Ergon Inc. expects to have £225 million in earnings at the end of the year and earnings are expected to grow at 8% annually. The firm does not pay any dividends, but it intends to use 29% of its earnings for stock repurchases. Ergon's cost of equity is 35% and it has 45 million shares outstanding. Calculate Ergon's stock price. 

b) ABC Corporation expects to have earnings per share of £12 next year. Rather than reinvest these earnings and grow, the firm plans to pay out all of its earnings as a dividend. With these expectations, of no growth, ABC's current share price is £20. Suppose ABC could cut its dividend payout rate to 35% next year and use the retained earnings to open new stores. The return on its investment in these stores is expected to be 23.3%. Assuming its equity cost of capital and the new growth rate remain unchanged, what effect would this new policy have on ABC's stock price? 

d) You are the owner of a firm that currently generates revenues of £21 million per year. Next year, revenues will either decrease by 2% with 30% probability or increase by 20% with 48% probability and then stay at that level for as long as you run the business. You own the firm outright. Also, you have annual costs of £100,000. If you decide to shut down the firm the cost is zero. In that case, you can always sell the firm for £320,000. What is the business worth today if the cost of capital is 32%? [15 marks]

e) Zweite Pharma is a fast-growing company. The company forecasts that in the next three years its growth rates will be 30%, 28% and 24% respectively. After three years, the company expects a more stable growth of 8% that will last forever. Last week it declared a dividend of £1.27. The required rate of return is 11%.

i) Compute the dividends for the next three years and find their present value.

ii) Calculate the price of the shares at the end of year 3 when the firm settles to a constant growth.

iii) What is the current price of the shares?