er Systems earned $20 per share at the beginning of the year and paid out $10 in dividends to shareholders (so, D0=$10) and retained $10 to invest in new projects with an expected return on equity of 21 percent. In the future, Solarpower expects to retain the same dividend payout ratio, expects to earn a return of 21 percent on its equity invested in new projects, and will not be cha
er Systems earned $20 per share at the beginning of the year and paid out $10 in dividends to shareholders (so, D0=$10) and retained $10 to invest in new projects with an expected return on equity of 21 percent. In the future, Solarpower expects to retain the same dividend payout ratio, expects to earn a return of 21 percent on its equity invested in new projects, and will not be cha
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Solarpower Systems earned
return on equity of
$20
per share at the beginning of the year and paid out
$10
in dividends to shareholders (so,
D0=$10)
and retained
$10
to invest in new projects with an expected 21
percent. In the future, Solarpower expects to retain the same dividend payout ratio, expects to earn a return of
21
percent on its equity invested in new projects, and will not be changing the number of shares of common stock outstanding.a. Calculate the future growth rate for Solarpower's earnings.
b. If the investor's required rate of return for Solarpower's stock is
14
percent,
what would be the price of Solarpower's common stock?c. What would happen to the price of Solarpower's common stock if it raised its dividends to
$14
and then continued with that same dividend payout ratio permanently? Should Solarpower make this change? (Assume that the investor's required rate of return remains at
14
percent.)
d. What would happened to the price of Solarpower's common stock if it lowered its dividends to
dividend growth rate model work in this case? Why or why not? (Assume that the investor's required rate of return remains at
$4
and then continued with that same dividend payout ratio permanently? Does the constant 14
percent and that all future new projects will earn
21
percent.)Expert Solution
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