4. Payout Policy and Stock Price A company expects to have earnings of $5 pet share in the coming year. The company has been paying all of its earnings as dividends. The market expects the company to keep the same payout policy in the future. Based on the expectation, the share currently sells for $40. (a) With the current payout policy in place, there is no growth in assets, and thercforc, the company's tarnings will remuin the same forever. Using the current share price, find the firm's equity cust of capital. (b) The company considers reducing its payout ratio and using retained earnings to expand its business. Its return on assets is constant at 15%. For each of the following payout ratios, find dividend in year 1 , growth rate in dividends, and the resulting stock price. (c) Among considered payout ratios in (b). which ratio results in the highest stock price