Solarpower Systems earned

$20

per share at the beginning of the year and paid out

$8

in dividends to shareholders (so,

D0=$8)

and retained

$12

to invest in new projects with an expected return on equity of

21

percent. In the future, Solarpower expects to retain the same dividend payout ratio, expects to earn a return of

21

percent on its equity invested in new projects, and will not be changing the number of shares of common stock outstanding.

a.Calculate the future growth rate for Solarpower's earnings.

b.If the investor's required rate of return for Solarpower's stock is

13

percent,

what would be the price of Solarpower's common stock?

c.What would happen to the price of Solarpower's common stock if it raised its dividends to

$13

and then continued with that same dividend payout ratio permanently? Should Solarpower make this change? (Assume that the investor's required rate of return remains at

13

percent.)

d.What would happened to the price of Solarpower's common stock if it lowered its dividends to

$3

and then continued with that same dividend payout ratio permanently? Does the constant dividend growth rate model work in this case? Why or why not? (Assume that the investor's required rate of return remains at

13

percent and that all future new projects will earn

21

percent.)