Solarpower Systems expects to earn

$20

per share this year and intends to pay out

$10

in dividends to shareholders (so,

Upper D 10 (D0=$10)

and retain

$10

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

19%.

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

19%

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

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

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

14%,

what would be the price of Solarpower's ordinary shares?

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

$14

thisyear 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

14%.)

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

$4

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

14% and that all future new projects will earn

19%.)