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Was having difficulty with this practice problem set. Could you please help? Will be sure to leave a review! Thank you so much! Investco had
Was having difficulty with this practice problem set. Could you please help? Will be sure to leave a review! Thank you so much!
Investco had $5 earning per share this past year and paid 50% of earnings as dividends at the end of the year (i.e., now at time 0). Investco intends to plow back 30% of earnings this coming year (i.e., at time 1), 60% the following year and 25% thereafter. Assume that starting from today earnings are expected to grow at 4% indefinitely. Furthermore, assume that investors required rate of return on equity is 15%. For simplicity, assume that dividends are paid once a year and that the next dividend payment is exactly one year away. a) (6 points) What should be Investco's price today? b) (6 points) Following an intense board meeting the CEO has announced that the board decided to change the investment policy so that in the next three years Investco will reinvest all earnings. From time 4 onward the company intends to payout 40% of earnings as dividends. Analysts predict that as a result of this change in investment policy earnings four years from now (i.e., at time 4) will be $8 per share. If as a result of the announcement Investco stock price has changed to $23.379 what do investors in the market believe Investco's long term annual earnings growth would beStep by Step Solution
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