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The stock of Wilson Corporation is currently selling for 20 per share. Earnings per share in the coming year are expected to be 2. The
The stock of Wilson Corporation is currently selling for 20 per share. Earnings per share in the coming year are expected to be 2. The required rate of return on the company equity is 15%. This situation is expected to continue indefinitely. i. How much would the stock price be if all earnings are paid out as dividends and nothing is reinvested? ii. If the company decides to retain 50% of the earnings in the next year to invest into projects with a return on equity (ROE) of 15%, what would be the stock price? iii. However, if the company finds a new project with a ROE of 20%. The company decides to retain 50% of the earnings in the future years to invest into the projects, what would the stock price be? iv. Discuss the results from questions (i) to (iii) and what implications you can draw from
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