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. Ergons cost of equity is 15% and it has 25 million shares outstanding. Calculate Ergons 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, ABCs 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 ABCs stock price? [7 marks]