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XYZ Corp. expects to have earnings per share of $10 in the coming year. The current share price is $100. The company pays $8 per
XYZ Corp. expects to have earnings per share of $10 in the coming year. The current share price is $100. The company pays $8 per share in annual cash dividends. The growth rate is 2%. . According to XYZ's announcement today, the company will cut dividend to $4 per share and use the additional retained earning to develop a new product. From this new investment, the company's growth rate is expected to increase to 4%. . Note that the cost of equity does not change even after the announcement. (a) What is the cost of equity? [6 pt.] (b) What is the dividend payout ratio after the announcement? [5 pt.] (c) What is the return on the new investment? [6 pt.] (d) What is the new stock price after the announcement? Do you think XYZ's shareholders will accept this new dividend policy? [8 pt.]
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