XYZ Corporate starts with $20,000 book value of equity capital and zero debt. The ROE for the company is 15% and the required rate of return for the company is 12%. There are 500 shares outstanding. Now, XYZ Corporation decides that it will always reinvest 60% of earnings back in the company and pay out 40% of earnings each year in dividends to the shareholder. Thus, dividends for this company will grow at a constant rate.

Year 1 Year 2 Book Value 10,000 10,000 Cash Flow 2,500 2,500 Dividends 2,500 2,500 Retained earnings 0 0 EPS 8.33 8.33 Div/share 8.33 8.33