Question
Shirley's Sandwiches expects earnings per share of this year (at t=1) of $20.62. The company has a large number of good projects and plans to
Shirley's Sandwiches expects earnings per share of this year (at t=1) of $20.62. The company has a large number of good projects and plans to reinvest all earnings with a return on new investment of 19.0%. This will continue until t=8. At that point, the firm expects to have fewer good projects. It will, therefore, begin paying a dividend of 32% of earnings (the first payment at t=8), with all remaining earnings reinvested with a return on new investment of 4.4% The payout ratio and return on new investment is expect to stay constant forever. If Shirley's cost of equity capital is 12.7%, what is the current price of the stock?
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