The value of this dividend stream in terms of
dollars is
But this must be equated to one dollar to find the
indifference point,i.e.,
So under the optimal policy:
The firm grows at rate g until ,Since g r, the
entire growth can be financed out of retained earnings.
Thus, there is no need to resort to external financing
which is more expensive (0 c 1). Then from ,
the firm issues dividends since there is no salvage value at T.