DFIB, Inc., expects earnings this year of $5.36 per share, and it plans to pay a $3.13 dividend to shareholders. DFIB will retain $2.23 per share of its earnings to reinvest in new projects with an expected return of 15.6% per year. Suppose DFIB 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 DFIB?

b. If DFIB's equity cost of capital is 11.7%, what price would you estimate for DFIB stock?

c. Suppose DFIB instead paid a dividend of $4.13 per share this year and retained only $1.23 per share in earnings. That is, it chose to pay a higher dividend instead of reinvesting in as many new projects. If DFIB maintains this higher payout rate in the future, what stock price would you estimate now? Should DFIB follow this new policy?