Q 16)Take the example of a US corporation whose next annual earnings are expected to be $20 per share, with a constant growth rate of 5 percent per year, and with a 50 percent payout ratio. Hence, the next-year dividend is expected to be $10. Let's further assume that the required rate of return for an investment in such a corporation is 10 percent, which can be decomposed into a 6 percent risk free rate plus a 4 percent risk premium. (1) Firm's value (2) (2) PE (3) (3) The sustainable growth rate of the corporation. - Company's sustainable growth rate is equal P0 = 0 10 10 0 05 =200 to the retention rate bmultiplied by ROE: ' ' - g= b x ROE p/E=1_b i 10 =0.5X0.12 rg=0.10-0.05= 6'V _ 0