Question

​(Measuring growth)  Solarpower Systems earned ​$20 per share at the beginning of the year and paid out ​$8 in dividends to shareholders​ (so, D 0 = $ 8​) and retained ​$12 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 changing the number of shares of common stock outstanding.

Q:

Calculate the future growth rate for​ Solarpower's earnings.

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?

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​.)

What would happened to the price of​ Solarpower's common stock if it lowered its dividends to ​$2 and then continued with that same dividend payout ratio​ permanently? Does the constant dividend growth rate model work in this​ case? Why or why​ not? ​ (Assume that the​ investor's required rate of return remains at 14 percent and that all future new projects will earn 21 ​percent.)

Answer 1