1. Simik Corporation is a large construction company listed on ASX. Stocks of Simik Corporation are currently selling for $25 per share. In a recent report, equity analyst Zoe Root of Barmy Capital forecasted the earnings per share for Simik to be $5 in the coming year. The company distributes 90% of its earnings each year as dividends. The rest of the profits are retained and invested in projects that earn a 20% rate of return per annum.

1. If the current market price of Simiks stock reflects its intrinsic

value as computed using the constant-growth DDM, then find out

the rate of Return Simiks investors require?

2. In her report, Zoe suggested that to increase the intrinsic value of

the firm, Simik should re-invest at least 40% of its profit.

Do you agree with her suggestion? Justify your answer with an

explanation.