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What is the price of a share of Hertz stock

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Question - Suppose you learn that Hertz will have EPS of 2 dollars for the coming year (t=1). Hertz plans to retain all of its earnings for the next three years (i.e. not payout anything).  The following two years (t=4 and t=5), the firm plans on retaining only half (or 50%) of its earnings.  Starting in year 6, it will retain only 25% of its earnings (t=6 and after). Retained earnings will be invested in projects with an expected return of 20 percent per year [this rate along with the retention rate tells you how much dividends grow].  If Hertz's equity cost of capital is 12%, then what is the price of a share of Hertz's stock?

a. $18

b. $20

c. $27

d. $32

Reference no: EM133063960

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