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In 2014, a company earned $10m and paid a dividend of $6m. It plans to pay the same payout ratio for the next 4 years

In 2014, a company earned $10m and paid a dividend of $6m. It plans to pay the same payout ratio for the next 4 years and will generate a 30% ROI. After that, it will pay a 75% dividend with an 20% ROI. The discount rate is 8%. What's the firm's equity at the beginning of 2015? What would the equity be if it in 2015, it decided to pay 100% of its earnings as dividends?

  • I assumed in 2015, you're starting with $4m in equity. $10m in earnings - $6m in payout from the previous year. Is that thinking too simplistically?

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