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a) A stock is trading at $50. Next year’s dividend is projected to be $3.50 per...

a) A stock is trading at $50. Next year’s dividend is projected to be $3.50 per share. Investors typically demand a 12% return on common stocks in this industry. This company has historically paid out 50% of earnings. How fast would you expect this company’s earnings to be growing? What would you expect the company’s ROE to be?

b) If one assumes that the role of a company’s board of directors is to maximize the value of the company’s common shares, and that the company’s ROE will remain where it is, what should this company’s dividend policy be, in terms of its retention ratio? Explain with reference to the dollar impact on share price.

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Answer #1

I have calculated everything below .

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Took a lot of efforts

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