What price would estimate for xyz stock now

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XYZ Corporation expects to have earnings this coming year of $3 per share. XYZ plans to retain all of its earnings for the next two years. For the subsequent two years, the firm will retain 50% of its earnings. It will then retain 20% of its earnings from the point onward. Each year, retained earnings will be invested in new projects with an expected return of 25% per year. Any earnings that are not retained will be paid out as dividends. Assume XYZ's share count remains constant and all earnings growth comes from the investment of retained earnings.

Question a. If XYZ's equity cost of capital is 10%, what price would you estimate for XYZ stock now?

Question b. If you are a shareholder of XYZ Corporation, would you ask the Board to pay out all earnings as dividend to shareholders? Why or why not?

Reference no: EM132519152

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