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The stock of Nogro Corporation is currently selling for $20 per share. Earnings per share in the coming year are expected to be $5. The company has a policy of paying out 50% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 25% 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?
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?
PVGO =
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