a) Ergon Inc. expects to have 125 million in earnings at the end of the year and earnings are expected to grow at 6% annually.The firm does not pay any dividends, but it intends to use 25% of its earnings for stock repurchases. Ergon's cost of equity is 15% and it has 25 million shares outstanding. Calculate Ergon's stock price. [7 marks]

b) ABC Corporation expects to have earnings per share of 6 next year. Rather than reinvest these earnings and grow, the firm plans to pay out all of its earnings as a dividend. With these expectations, of no growth, ABC's current share price is 60. Suppose ABC could cut its dividend payout rate to 75% next year and use the retained earnings to open new stores. The return on its investment in these stores is expected to be 12%. Assuming its equity cost of capital and the new growth rate remain unchanged, what effect would this new policy have on ABC's stock price? [7 marks]

c) You are the owner of a firm that currently generates revenues of 1 million per year. Next year, revenues will either decrease by 8% with 60% probability or increase by 10% with 40% probability and then stay at that level for as long as you run the business. You own the firm outright. Also, you have annual costs of 700,000. If you decide to shut down the firm the cost is zero. In that case, you can always sell the firm for 600,000. What is the business worth today if the cost of capital is 12%? [15 marks]