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The stock of Nogro Corporation is currently selling for $10 per share. Earnings per share in the coming year are expected to be $2. The

The stock of Nogro Corporation is currently selling for $10 per share. Earnings per share in the coming year are expected to be $2. The company has a policy of paying out 50% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 20% rate of return per year. 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 Nogros investors require? (Do not round intermediate calculations.)

Rate of return %

b.

By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested?

PVGO $

c-1. If Nogro were to cut its dividend payout ratio to 25%, what would happen to its stock price?
Stock price would be decreased
Stock price would be increased
Stock price would be unaffected

c-2. If Nogro eliminated the dividend, what would happen to its stock price?
Stock price would be unaffected
Stock price would be increased
Stock price would be decreased

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