Spencer Supplies 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.

Spencer Supplies 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.

Intermediate Financial Management  By Eugene F. Brigham, Philip R. Daves

         

P10-12 Spencer Supplies 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.

a. If investors require a 9% return, what rate of growth must be expected for Spencer?

b. If Spencer reinvests earnings in projects with average returns equal to the stock’s expected rate of

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return, what will be next year’s EPS? [Hint: g=ROE (Retention ratio).]