a) A stock is trading at $50. Next years dividend is projected to be $3.50 per share. Investors typically demand a 12% return on common stocks in this industry. This company has historically paid out 50% of earnings. How fast would you expect this companys earnings to be growing? What would you expect the companys ROE to be?

b) If one assumes that the role of a companys board of directors is to maximize the value of the companys common shares, and that the companys ROE will remain where it is, what should this companys dividend policy be, in terms of its retention ratio? Explain with reference to the dollar impact on share price.