Problem:
In the past, Sunnyfax publishing paid out all its earnings as dividends. When the stock market opened for trading today, Sunnyfax's share price was $38 and earning for the year ending today are $3 per share. At the end of the day and after paying their $3 dividend, Sunnyfax surprises investors by announcing they will cut its dividend payout in future years from 100% to 66.67% and reinvest the retained funds. The rate of return on invested capital is expected to by 12%.
Required:
Question: If the reinvestment does not affect Sunnyfax's equity cost of capital, what is the expected share price as a consequence of this decision?
A) $26.34
B) $51.35
C) $53.40
D) $80.11
Note: Show supporting computations in good form.