The stock of Neo Corporation is currently selling for $20 per share. Earnings per share in the coming year are expected to be $1. The company has a payout policy of paying out 30% of its earnings each year in the form of dividends. The rest is retained and invested in projects that earn a 10% rate of return per year. This situation is expected to continue indefinitely.

1. What rate of return do Neos investors require?

2. The company wants to have a payout policy that maximizes its sharehold- ers value. Is the current payout policy optimal? If not, what proportion of earnings should the company pay out each year in the form of dividends?