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Suppose you learn that Hertz will have EPS of 2 dollars for the coming year (t=1). Hertz plans to retain all of its earnings for
Suppose you learn that Hertz will have EPS of 2 dollars for the coming year (t=1). Hertz plans to retain all of its earnings for the next three years (i.e. not payout anything). The following two years (t=4 and t=5), the firm plans on retaining only half (or 50%) of its earnings. Starting in year 6, it will retain only 25% of its earnings (t=6 and after). Retained earnings will be invested in projects with an expected return of 20 percent per year (this rate along with the retention rate tells you how much dividends grow]. If Hertz's equity cost of capital is 12%, then what is the price of a share of Hertz's stock? Note: pick the number that is closest to the correct value. Select one: a. $18 b. $20 c. $27 d. $32 Your answer is correct. The correct answer is: $27
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