Question
The sales and earnings for ETail are expected to grow rapidly over the next 6 years. Although the firm plans to retain and reinvest 100
The sales and earnings for ETail are expected to grow rapidly over the next 6 years. Although the firm plans to retain and reinvest 100 percent of earnings during each of the next 5 years, ETail expects to begin paying out 60% of earnings during the fiscal year ending in October of 2025, with an initial shareholder dividend of $3.00 per share to be paid in October of 2025 (at date 6). From date 6 on, E-Retailing is expected to retain a constant fraction of its earning to be reinvested at a constant rate of return on equity. Assuming that E-Retailing's stock is currently trading at a price of $37.26 per share and that the required rate of return for E-Retailing's stock is 10%, determine the rate of return on its new equity investments (ROE) that E-Retailing's shareholders expect the firm to earn from date six
onwards.
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