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1 . FM corporation earns a ROE of 1 2 % . It reinvests one - half its earning and pays out the other half
FM corporation earns a ROE of It reinvests onehalf its earning and pays out the other half
as cash dividends. The cost of capital is
a Given this ROE and dividend payout ratio, what is the growth rate of FM dividends?
b Assume this growth rate is expected to continue in perpetuity. What is the present value
of FM shares? Assume that book value per share is $ and the first payment of dividends
happens at the end of the current year.
c Suppose FM decides to pay out all its earnings as cash dividends. Therefore it does not grow.
What is the present value of FM shares?
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