DFB, Inc., expects earnings this year of $ 4.22 pershare, and it plans to pay a $ 2.53 dividend to shareholders. DFB will retain $ 1.69nper share of its earnings to reinvest in new projects with an expected return of 15.2 % per year. Suppose DFB will maintain the same dividend payoutrate, retentionrate, 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 forDFB?

b. IfDFB's equity cost of capital is 12.8 %, what price would you estimate for DFBstock?

c. Suppose DFB instead paid a dividend of $ 3.53 per share this year and retained only $ 0.69 per share in earnings. Thatis, it chose to pay a higher dividend instead of reinvesting in as many new projects. If DFB maintains this higher payout rate in thefuture, what stock price would you estimatenow? Should DFB follow this newpolicy?