Please Help

A company expects to have earnings of $5 per share in the coming year. The company has been paying all of its earnings as dividends. The market expects the company to keep the same payout policy in the future. Based on the expectation, the share currently sells for $40. (a) With the current payout policy in place, there is no growth in assets, and therefore, the companys earnings will remain the same forever. Using the current share price, find the firms equity cost of capital. (b) The company considers reducing its payout ratio and using retained earnings to expand its business. Its return on assets is constant at 15%. For each of the following payout ratios, find dividend in year 1, growth rate in dividends, and the resulting stock price. Payout ratio Dividend in year 1 (D1) Dividend growth rate (g) Stock price (P0) 0.9 0.8 0.7 0.6 0.5 (c) Among considered payout ratios in (b), which ratio results in the highest stock price?