6. Answer all parts of this question. a) The stock of DRAM PLC is currently selling for 20 per share. Earnings per share in the coming year are expected to be 3.50. The company, whose capital structure consists solely of equity, has a policy of paying out 25% of its earnings each year in dividends. The remaining part is retained and invested in projects that earn a 5% internal rate of return per year. This situation is expected to continue indefinitely. 1) Show that the growth rate g in earings that is consistent with a pay-out ratio PYT and return on equity ROE is g = (1 - PYT)*ROE. [5 marks] II) Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth Dividend Discount Model, what rate of return do DRAM's investors require ? [5 marks] ii) By how much would DRAM's stock price change if all its earnings were paid as dividends and nothing was reinvested? [5 marks] b) Clearstream has made the decision to invest in a new project with a high positive NPV. Before the investment decision has been announced to the public, a director of Clearstream however buys shares under an assumed name and makes an enormous profit by selling them just after the new investment is eventually disclosed to the world but before the project generates any cash flow. What do these facts tell us about the efficiency of this stock market? (5 marks] [Total 20 Marks]