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Ch. 7 Practice Exercise #1. RamTech Inc. projects earnings of $3/share next year. The company plans...

Ch. 7 Practice Exercise
#1. RamTech Inc. projects earnings of $3/share next year. The company plans on retaining all of those earnings to invest in new projects which have a 20% expected return. Going forward RamTech plans to gradually reduce its retention rate by retaining 70%, 35%, 15% of its earnings in each of the following three years. After that retention is expected to remain stable at 5%. All earnings that are not retained are paid out as dividends. Required return on equity is 14%, what is the price of RamTech’s stock today?

#2. What would the price of RamTech be today if instead they set a constant retention rate of 25% effective immediately?

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