Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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If ROE > rS, then a company will increase shareholder value (stock price will go up) when retaining earnings and reinvesting them within the company. Assume a firm has ROE = 20% and rS
= 15% . Next period's earnings (E1) will be $8 per share. Calculate the share price if the firm retains 25% of its earnings (and pays out 75% as a dividend). Calculate the share price if the firm
retains 50% of its earnings (and pays out 50% as a dividend). What is the difference in price? A.) $7.50 B.) $2 C.) $11.25 D.) $20 E.) $15
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Transcribed Image Text:If ROE > rS, then a company will increase shareholder value (stock price will go up) when retaining earnings and reinvesting them within the company. Assume a firm has ROE = 20% and rS = 15% . Next period's earnings (E1) will be $8 per share. Calculate the share price if the firm retains 25% of its earnings (and pays out 75% as a dividend). Calculate the share price if the firm retains 50% of its earnings (and pays out 50% as a dividend). What is the difference in price? A.) $7.50 B.) $2 C.) $11.25 D.) $20 E.) $15
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