APPLE expects earnings at the end of this year of $3 per share (i.e., EPS1), and it plans to pay a $1 dividend to shareholders (assume that is one year from now, DIV1). APPLE will retain $2 per share of its earnings to reinvest in new projects that have an expected return of 11% per year. Suppose APPLE will maintain the same dividend payout rate, retention rate, and return on new investments in the future and will not change its number of outstanding shares.

a. What growth rate of earnings would you forecast for APPLE?

b. If APPLEs equity cost of capital is 8%, what price would you estimate for APPLE stock today (P0)?

c. Suppose instead that APPLE paid a dividend of $2 per share at the end of this year (DIV1) and retained only $1 per share in earnings. That is, it chose to pay a higher dividend instead of reinvesting in as many new projects. If APPLE maintains this higher payout rate in the future, what stock price would you estimate for the firm now? Should APPLE raise its dividend?