If a firm's required rate of return equals the firm's return on equity, there is no advantage to increasing the firm's growth. Suppose a no-growth firm had a required rate of return and a ROE of 12%, and the dividends just paid out were $4.80 per share (i.e. a no-growth firm would typically pay all of its earnings as dividends).

However, the firm CFO just announced that he expects that the firm will be able to increase the ROE to 15% and will change the dividend payout to 40% of earnings. This is not expected to change the required rate of return and earnings 1 year from now are expected to stay at $4.80 per share before the changes take effect.

7. What is the price of the stock before the CFOs announcement?

1. $4.0
2. $40.0
3. $48.0
4. $57.6
5. $80.0

8. What would be the price of the stock after CFOs announcement?

1. $21.3
2. $32.0
3. $64.0
4. $80.0
5. $160.0