Question
You own 100 shares in the firm Alfa. The current share price is 10 and the earnings per share is 0.70. Assume there are no
You own 100 shares in the firm Alfa.
The current share price is 10 and the earnings per share is 0.70.
Assume there are no capital market imperfections and that Alfa's annual earnings will remain constant in future.
Alfa pays out all of its earnings each year as dividends.
You prefer to invest your money in the firm, so you reinvest each year's dividend in the firm by buying more of its shares.
Your investment horizon is 10 years.
a) What is the value of your investment after 10 years? What would the value of your investment have been, if Alfa's policy was a zero dividend payout over the same period?
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