Question
A share of stock trades at a price of $100 per share. Dividends are expected to grow at a constant rate in perpetuity. The dividend
A share of stock trades at a price of $100 per share. Dividends are expected to grow at a constant rate in perpetuity. The dividend to be paid at the end of the first year is $5. The total rate of return in 10%.
a) What must be the perpetual growth rate of the dividends?
b)Assume that all growth is fueled by plowing back earnings. If the plowback ratio is 50% what was the firm's return on reinvested funds?
c) If they decide to payout more than 50% of earnings, what would happen to stock price?
d) If the firm's ROE were 9% what would have happened to the stock price is payout were increased?
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