A company has a free cashow to equity holders equal to 10,500,000 EUR next year (that is, year 1), which is expected to grow perpetually at a 2% rate. There are 2,500,000 shares outstanding and the company has historically distributed the whole free cashow to equity holders as dividends. The company now announces that it will pay 50% of the free cashow to equity holders as dividend and use the remaining amount to buy back shares (right after the dividend is paid). Assume that the levered return on equity is 11.50%.

a) What is the new share price after the dividend payment and the share buy-back? [5 Points]

b) What is the dividend growth rate between year 1 and year 2 under the new payout policy? [10 Points]