The M&M Growth Company has a return on equity of $10\%$ per year, and the market uses a

discount rate of $10\%.$ Its earnings per share are expected to be $$1\mathrm{.}00$ over the next year.

a$.$ If the company has a dividend payout ratio of $50\%,$ what is the sustainable growth

rate?

HINT: The sustainable growth rate is the growth rate at which the company can

grow using retained earnings without issuing new equity:

g $=$ ROE$*(1-$dividend payout ratio$)$

b$.$ If the company has a dividend payout ratio of $50\%,$ what is the stock price today?

$[$HINT: Use the constant growth form of the dividend discount model to calculate

the growth rate of dividends.$]$

c$.$ If instead, the company has a dividend payout ratio of $75\%,$ what are the new

sustainable growth rate and the new stock price? $[$HINT: Note that the change in

dividend payout ratio also changes the sustainable growth rate that you would use

for g in the formula.$]$

d$.$ If instead, the company has a dividend payout ratio of $1\%,$ what are the new

sustainable growth rate and the new stock price?

$8$