Problem:1
Spencer Supplies's stock is currently selling for $60 a share. The firm is expected to earn $5.40 per share this year and to pay a year-end dividend of $3.60.
Required:
Question 1: If investors require a 9% return, what rate of growth must be expected for Spencer?
Question 2: If Spencer reinvests earnings in projects with average returns equal to the stock's expected rate of return, then what will be next year's EPS?
Note: Please show how to work it out.