Measuring growth$)$Solarpower Systems earned $$$$20$ per share at the beginning of the year and paid out $$$$9$ in dividends to shareholders$($so$,$ Upper D $0$ equals $ $9)$ and retained $$$$11$ to invest in new projects with an expected return on equity of $21$ percent. In the$$ future, Solarpower expects to retain the same dividend payout$$ ratio, expects to earn a return of $21$ percent on its equity invested in new$$ projects, and will not be changing the number of shares of common stock outstanding.

a$.$Calculate the future growth rate for$$ Solarpower's earnings.

b$.$If the$$ investor's required rate of return for$$ Solarpower's stock is $15$ percent$,$ what would be the price of$$ Solarpower's common$$ stock?

c$.$What would happen to the price of$$ Solarpower's common stock if it raised its dividends to $$$$14$ and then continued with that same dividend payout ratio$$ permanently? Should Solarpower make this$$ change? $($Assume that the$$ investor's required rate of return remains at $15$ percent$.)$

d$.$What would happened to the price of$$ Solarpower's common stock if it lowered its dividends to $$$$3$ and then continued with that same dividend payout ratio$$ permanently? Does the constant dividend growth rate model work in this$$ case? Why or why$$ not? $($Assume that the$$ investor's required rate of return remains at $15$ percent and that all future new projects will earn $21$percent$.)$

Question content area bottom

Part $1$

a$.$What is the future growth rate for$$ Solarpower's earnings?

$$

enter your response here$\%($Round to two decimal$$ places.$)$

Part $2$

b$.$If the$$ investor's required rate of return for$$ Solarpower's stock is $15\%,$ what would be the price of$$ Solarpower's common$$ stock?

$$$

$$

enter your response here $($Round to the nearest$$ cent.$)$

Part $3$

c$.$What would happen to the price of$$ Solarpower's common stock if it had raised its dividends to $$$$14($Upper D $0=$$$14)$ and then continued with that same dividend payout ratio$$ permanently?$$

$$$

$$

enter your response here $($Round to the nearest$$ cent.$)$

Part $4$

Should Solarpower make this$$ change?$($Select from the$$ drop$-$down menus.$)$

Solarpower

$$

should

should not

raise its dividend because the retention ratio will

$$

increase

decrease

and the value of the common stock will

$$

increase

decrease

$.$

Part $5$

d$.$What would happen to the price of$$ Solarpower's common stock if it had lowered its dividends to $$$$3($Upper D $0=$$$3)$ and then continued with that same dividend payout ratio$$ permanently?

$$$

$$

enter your response here $($Round to the nearest$$ cent.$)$

Part $6$

Does the constant dividend growth rate model work in this$$ case? Why or why$$ not?$($Select the best choice$$ below.$)$

A$.$

$$Yes$,$ the constant dividend growth rate model works in this case where the required return on the stock is less than the projected growth rate because the$$ firm's value will become negative when the ecomony that houses it experiences a substantial higher growth rate.

B$.$

$$No$,$ the constant dividend growth rate model does not work in this case where the required return on the stock is less than the projected growth rate because it is not possible for a firm to grow at such an unsustainable lower rate while the enviroment that houses it can only grow at a higher rate.

C$.$

$$No$,$ the constant dividend growth rate model does not work in this case where the required return on the stock is greater than the projected growth rate because it is not possible for a firm to grow at such an unsustainable higher rate while the enviroment that houses it can only grow at a lower rate.

D$.$

$$Yes$,$ the constant dividend growth rate model works in this case where the required return on the stock is greater than the projected growth rate because the$$ firm's value will become negative when the ecomony that houses it experiences a substantial lower growth rate.