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You are given the following information about a firm: - Expected earnings per share at the end of first year (time 1) = EPS 1=$10
You are given the following information about a firm: - Expected earnings per share at the end of first year (time 1) = EPS 1=$10 - Expected dividend per share at the end of first year (time 1) =DIV1=$5 - Book value per share today (time 0) = $90 - Current share price =P0=$120 In the following, assume the market uses the constant dividend growth model to value this firm. A. What is the growth rate g of the firm's dividends? Input in percent rounded to two decimal places (without the percent sign). B. What is the firm's market capitalization rate, r ? Input in percent rounded to two decimal places (without the percent sign). C. Under these conditions, if you bought one share of the firm, held it for one year, and then sold it, what price would you expect to receive a year from today (assuming you sold the share immediately after next year's dividend payment)? Round to the nearest dollar and input without the \$ sign. D. Now assume that the firm announces today that it has discovered a new investment opportunity. To make this new investment it will reduce its dividend payout ratio forever, with the result that the dividend to be paid at the end of next year will drop from $5 to $3. If the new investment has the same ROE as the firm's existing investments, what will the price of a share be just after the firm makes the announcement (i.e. still at time 0)? Round to the nearest dollar and input without the \$ sign
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