3 4 Puma expects earnings at the end of this year of $5 per share, and it plans to pay a $3 dividend per share (one year from now). Puma will retain $2 per share of its earnings to reinvest in new projects that have an expected return of 15% per year. Suppose Puma will maintain the same dividend payout rate, retention rate, and return on new investmeny in the future and will not change its number of outstanding shares. 5 6 7 8 a. What growth rate of earnings would you forecast for Puma? 9 10 b. If Puma's equity cost of capital is 12%, what price would you estimate for Puma's stock today? 11 12 13 c. Suppose instead that Puma paid a dividend of $4 per share at the end of this year and retained only $1 per share in earnings. If Puma maintains this higher payout rate in the future, what stock price would you estimate for the firm now? Should Puma raise its dividend? 14 15 16