. A company expects earnings in the current year to be $5 per share, and plans to pay a $3 dividend to shareholders. The company will retain $2 per share of its earnings to reinvest in new projects with an expected return of 15% per year. Suppose the company will maintain the same dividend payout rate, retention rate, and return on new investments in the future and will not change its number of outstanding shares

Q. No. 3 (A). A company expects earnings in the current year to be $5 per share, and plans to pay a $3 dividend to shareholders. The company will retain $2 per share of its earnings to reinvest in new projects with an expected return of 15% per year. Suppose the company will maintain the same dividend payout rate, retention rate, and return on new investments in the future and will not change its number of outstanding shares.

a. What growth rate of earnings would you forecast for the company?

b. If the equity cost of capital is 12%, what price would you estimate for the companys stock?

c. Suppose instead paying a dividend of $4 per share this year and retained only $1 per share in earnings. If the company maintains this higher payout rate in the future, what stock price would you estimate now? Should the company raise its dividend?