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Question 5 (Stock Valuation: 15 points) Two firms have identical expected earnings next year, equal to $10 per share, and identical required returns of 10%.

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Question 5 (Stock Valuation: 15 points) Two firms have identical expected earnings next year, equal to $10 per share, and identical required returns of 10%. Firm 1 chooses to pay out all future earnings as dividends and firm 2 decides to pay out only 75% of its earnings, investing the rest into projects with an ROE of 16%. What is the difference in the share prices of the two firms

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