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What growth rate of earnings would you forecast for amazon

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Question - Amazon Inc., expects earnings this year of $5 per share, and it plans to pay a $2 dividend to shareholders, DFB will retain $3 per share of its earnings to reinvest in new projects that have an expected return of 12% per year. Suppose Amazon will maintain the same dividend payout rate, retention rate, and return on new investments in the future and will not change its number of outstanding shares.

Required -

a. What growth rate of earnings would you forecast for Amazon?

b. If Amazon's equity cost of capital is 10%, what price would you estimate for Amazon stock?

c. Suppose instead that Amazon paid a dividend of $3 per share this year and retained $2 per share in earnings. If Amazon maintains this higher payout rate in the future, what stock price would you estimate for the firm now? Should Amazon follow this new policy?

Reference no: EM133174612

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