Problem $2$

Analysts expect that Cotton Corp. $($CC$)$ will report earnings of $$5$ million one year from today. CC$\text{'}$s policy is to pay out $60\%$ of its earnings in dividends $($it just paid its dividends for this year$).$ CC$\text{'}$s return on equity $($ROE$)$ is $9\%,$ and its required rate of return is $12\%.$ The company has $3$ million shares outstanding. Assume that the numbers above are representative of the foreseeable future.

a$)$ What is CC$\text{'}$s expected rate of dividend growth?

b$)$ Suppose the board of directors decided to change the dividend policy and pay out $100\%$ of CC$\text{'}$s earnings in dividends $($i$.$e$.,CC$ would pay out the full $$5$ million in dividends next year and then maintain this dividend policy forever$).$ What would be the stock price under this dividend policy? Would shareholders benefit from this decision?