Arnings were paid as dividends and nothing were reinvested

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Reference no: EM131525646

The stock of Nogro Corporation is currently selling for $16 per share. Earnings per share in the coming year are expected to be $2.60. The company has a policy of paying out 40% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 20% rate of return per year. This situation is expected to continue indefinitely. a. Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of return do Nogro’s investors require? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) Rate of return b. By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested?

Reference no: EM131525646

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