Problem: Company stock sells for 200 pesos per share and next year's dividend is 8.5 pesos. Security analysts are forecasting earnings growth of 7.5% per year for the next 5 years.
1) Assume that earnings and dividends are expected to grow at 7.5% in perpetuity. What rate of return are investors expecting?
2) The company has generally earned about 12% on book equity (roe = .12) and paid out 50% of earnings as dividends. Suppose it maintains the same roe and payout ratio in the long-run future. What is the implication for g? For r? Should you revise your answer to part (a) of this question?