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?