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Explain the principles of finance

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Principles of Finance

a) Crab and Apple Co expects that next year's earnings will be eight dollars per share (EPS1 = $8). The company normally pays out 80% of its earnings in dividends to its shareholders and plans to continue that practice. The company's financial staff expects that reinvested funds used in its capital spending program can earn a return on equity of 25%. Given the company's level of risk, shareholders demand a 20% required rate of return. Please help Mr. Gordon to determine the stock price.

b) ****News Flash**** The company just announced that it is changing its dividend policy and the payout ratio next year will be 30%. What happens to the stock price?

Reference no: EM133069505

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