Company A paid annual dividends of $3 in FY 2019 (D₀=$3). Its earnings per share was (EPS₀) was $5 while its ROE was 20%. Company A will maintain the same ROE and plowback ratio for the next three years. However, after three years (starting in year 4) Company A will maintain the same plowback ratio as before but it will enter a period of 4% constant growth (i.e. g₂ = .04). Assume a constant discount rate throughout the entire period. It was determined that Company A has a beta of 1.25 while the risk free rate is 2% and the expected return on the market portfolio is 10%.

A) Given this information, what is a fair value for Company A stock today using the multi-stage dividend discount model? (hint: start by using the information given to calculate b, g₁, D₁, D₂, D₃, D₄, and k)

B) What would be the fair value for Company A if starting in year 4 it permanently increased its payout ratio to 100%? (hint: if the payout ratio is equal to 100%, what will the plowback ratio be? Thus, what will D₄ equal? Finally, what will g₂ equal starting in year 4?)