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The required rate of return on ABCs equity is 8%, the current plowback ratio is 40%, and the next years dividend is $2 per share.

The required rate of return on ABCs equity is 8%, the current plowback ratio is 40%, and the next years dividend is $2 per share. Answer the following questions:

1) Assume ROE=8%. What is the current stock price? a. What will be the stock price if the plowback ratio changes to 20%? b. What will be the stock price if the plowback ratio changes to 60%? c. What should be the optimal payout policy of this firm?

2) Assume ROE=10%. What is the current stock price? a. What will be the stock price if the plowback ratio changes to 20%? b. What will be the stock price if the plowback ratio changes to 60%? c. What should be the optimal payout policy of this firm?

3) Assume ROE=6%. What is the current stock price? a. What will be the stock price if the plowback ratio changes to 20%? b. What will be the stock price if the plowback ratio changes to 60%? c. What should be the optimal payout policy of this firm?

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