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If the risk is equivalent then the equity cost of capital

Gate 5 Corporation expects earnings per share of $10 in the coming year. Rather than reinvest these earnings, it plans to pay its earnings as dividend. With no growth, Gate 5 current share is $105.26.

Assume that Gate 5 cuts it dividend payout rate to 60% and use the retained earnings to open new distribution centers. The return on investment in these centers is expected to be 15%. If the risk is equivalent, then the equity cost of capital is unchanged. Determine Gate 5 new price?

a) $285.71

b) $63.16

c) $105.26

d) $171.43

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Finance Basics: If the risk is equivalent then the equity cost of capital

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Finance Basics: If the risk is equivalent then the equity cost of capital

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