Firm A is expected to pay a dividend of $1.00 at the end of the year. The required rate of return is rs = 11%. Other things held constant, what would the stock’s price be if the growth rate was 5%? What if g was 0%? ($16.67, $9.09)

Firm B has a 12% ROE. Other things held constant, what would its expected growth rate be if it paid out 25% of its earnings as dividends? 75%? (9%, 3%)

If Firm B had a 75% payout ratio but then lowered it to 25%, causing its growth rate to rise from 3% to 9%, would that action necessarily increase the price of its stock? Why or why not?

AppendixLO1