The stock of Marlborough Inc. is currently selling for $30 per share. Earnings per share in the coming year are expected to be $6. The company has a policy f Plowright back 75% of its earnings each year and invested in projects that earn 15% return per year. The rest is paid out as dividends. This situation is expected to continue indefinitely.

a) assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of return do Marlborough Inc. investors require? (5 marks) b) Show what happens to the stock value if Marlborough pays out all of its earnings as dividends? Explain the reason for this. (5 marks)