Consider FI Corp. The company is in the consumer staples business and is less risky than average. Regressing the excess returns of the stock against the excess returns of the market, we find that FI Corp's $$ is $0\mathrm{.}8.$

a$)$ The risk$-$free rate stands at $4\mathrm{.}4\%$ and the equity risk premium $E[r_m-r_f]$ is $7\mathrm{.}00\%.$ Compute the market capitalization rate $k,$ also called cost of equity, for the firm.

The firm has just reported earnings per share of USD $8.$ The firm declares a dividend of USD $6$ per share. Management announces that the remainder will be reinvested. For next year, management plans to again pay out $75\%$ and reinvest the remaining $25\%$ of the earnings. Further inspection of the financial statement delivers the following information $($all numbers in millions$)$:

Income Statement

$\backslash$table$[[$Net Revenue,USD $12,000],[$COGS$,$USD $8,000],[$Gross Profit,USD $4,000],[$Operating Expense,USD $3,000],[$Operating Income,USD $1,000]]$

Balance Sheet

The firm's effective corporate tax rate is $t=25\%.$ Its borrowing cost is $r=6\%.$

b$)$ Using the information above, determine the firm's return on assets $($ROA$)$ and its return on equity $($ROE$).$ Hint: Recall that ROE$=(1-t)[ROA+(ROA-r)\frac{\text{D}\text{e}\text{b}\text{t}}{\text{E}\text{q}\text{u}\text{i}\text{t}\text{y}}].$

c$)$ Assuming that the firm reinvests $25\%$ of its earnings over the next two years and earns the ROE you have computed in part $b),$ what will be the earnings and dividends $E_1,D_1$ for year $1$ and $E_2,D_2$ for year $2?[$If you are unable to find ROE in b$),$ use ROE $=28\%.$ Note that this number is not the correct answer to b$)]$ After two years, the reinvestment opportunities of the firm become less profitable and the firm enters the stable growth phase. In this phase the firm will grow only at $g=4\%.$