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Determining the equity cost of capital

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Riverine Co. Limited expects to have earnings per share of 6$ in the coming year. Instead of reinvesting these earnings and growing, the firm plans to pay out all its earnings as a dividend. Riverine's current share price is 60$. Suppose, it cuts its dividend payout rate to 75% for the foreseeable future and uses the retained earnings to open branches. The return on its new possible investment is estimated to be 12%. Assuming that its equity cost of capital remains unchanged, what effect would this new policy have on it's stock price?

Reference no: EM132497836

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