Question: Assume that discount rate (capitalization rate) is 14.5% and a company pays all of its earnings as dividends which amounts to $15 per share.
(a) Find the current stock price.
(b) What will happen to the stock price if the company managers think that there are good investment opportunities and retain 30% of the earnings (plowback ratio) when the return on equity of the stock is ROE=0.15?
(c) Why do you think the stock price increase, when the dividends paid to investors decrease?