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You are thinking of investing in three stocks: X, Y and Z. Each stock is expected to pay a dividend of $9 per share in one year (t=1). The dividend for each stock is then expected to grow at 7.5% per year forever. The three stocks also have the same risk, hence the same cost of capital, 20%, and they are correctly priced, so each stock trades at a price equal to its intrinsic value. You also know that each firm reinvests a constant fraction of its earnings at the same ROE every year in perpetuity, and that without reinvestment, the earnings of each firm would be constant and equal to next years earnings every year forever.

Before concluding that the three firms are identical, you decide to take a closer look at the data for these firms. To your surprise, you find that the three firms have different earnings per share: the earnings per share in one year (t=1) are expected to be $22.5 for firm X, $14.4 for firm Y and $12 for firm Z.

Parts a. e. Calculate the current stock price (), the plowback ratio, the return on equity (ROE) and the present value of growth options (PVGO) for each firm. Fill in the shaded cells in the table below, and separately show how you got each answer.

	Firm X	Firm Y	Firm Z
Expected dividend per share in one year	$9	$9	$9
The expected dividend growth rate	7.5%	7.5%	7.5%
Cost of capital	20%	20%	20%
The expected cost of capital	$22.5	$22.5	$22.5
a. Current Stock Price (P0)
Payout Ratio
Plowback Ratio
ROE
PVGO

For parts f and g, suppose that you buy one share of each stock at t=0 at the price calculated in part a for that stock. Immediately after you buy the shares, each company announces that it plans to increase the dividend in one year by $1, from $9 to $10 per share. So each firm will increase its payout ratio for next year. Moreover, each firm will then maintain the new payout ratio constant forever. The ROE for each firm will remain the same as with the initial reinvestment policy. The dividend increases are announced at t=0.

Calculate the stock price for each firm at t=0, after the new reinvestment policy is announced.

Are you better off with the new reinvestment policy (corresponding to the $10 dividend per share), or with the initial reinvestment policy (corresponding to the $9 dividend per share)? Answer this question for each firm separately. Briefly motivate your answers (2 sentences at most for each firm).