1. If the Stanford Corporation’s net income is $228 million, its common equity, and management plans to retain 68 percent of the firm’s earning to finance new investments, what will be the firm’s growth rate?
2. Thomas, Inc.’s return on equity is 15 percent and management has plans to retain 23 percent of earnings for investment in the company.
a. What will be the company’s growth rate?
b. How would the growth rate change if management (i) increased retained earnings to 33 percent or (ii) decreased retention to 11 percent?
3. Green Gadgets Inc. is trying to decide whether to cut its expected dividends for next year from $9 per share to $6 per share in order to have more money to invest in new pojects. If it does not cut the dividend, Green Gadgets’s expected rate of growth in dividends is 4 prcent per yesr and the price of their common stock will be $110 per share. However, if it cuts its dividend, the dividend growth rate is expected to rise to 7 percent in the future. Assuming that the invertor’s required rate of return for Green Gadgets’ stock does not change, what would you expect to happen to the price of its common stock if it cuts the dividend to $6? Should Green Gadgets cut its dividend? Support your answer as best you can.
Common stock valuation:
4. Dubai Metro’s stock was at $105 per share when it announced that it will cut its dividend for next year from $7 per share to $3 per share, with additional funds used for expansion. Prior to the dividend cut, Dubai Metro expected its dividends to grow at a 3percent rate, but with the expansion, dividends are now expected to grow at 6 percent. How do you think announcement will affect Dubai Metro’s stock price?