Tempa Inc. expects earnings next year of $4.75 per share, and it plans to pay a $2.09 dividend to shareholders (assume that is one year from now). Tempa will retain $2.66 per share of its earnings to reinvest in new projects that have an expected return of 11% per year. Suppose Tempa will maintain the same dividend payout rate, retention rate, and return on new investments in the future and will not change its number of outstanding shares. Assume next dividend is due in one year. a. What growth rate of earnings would you forecast for Tempa Inc.? b. If Tempa's equity cost of capital is 9%, what is the estimated price (i.e. intrinsic value) for Tempa Inc. stock? c. Suppose instead that Tempa Inc. would pay a dividend of $3.42 per share at the end of this year and retain only $1.33 per share in earnings. That is, it chose to pay a higher dividend instead of reinvesting in as many new projects. If Tempa were to maintain this higher payout rate in the future, what stock price would you estimate for the firm now? Should Tempa Inc. raise its dividend?

Answer: a. Tempa's estimated earnings growth rate is %. (Round to two decimal places.) b. The estimated price (i.e. intrinsic value) for Tempa Inc. stock is $ . (Round to the nearest cent.) c. If Tempa were to pay a dividend of $3.42 per share next year and retained only $1.33 per share in earnings, then Tempa's stock price would be $ . (Round to the nearest cent.) d. Should Tempa raise its dividend? (Select the best choice below. Answer A, B, C, or D.) .. A Yes, Tempa should raise dividends because the return on new investments is lower than the cost of capital. B. No, Tempa should not raise dividends because companies should always reinvest as much as possible. C. No, Tempa should not raise dividends because the NPV of the new projects are positive (i.e. the reinvestment adds value to the firm). D. Yes, Tempa should raise dividends because, according to the dividend-discount model, doing so will always improve the share price.