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Engineering, 14.06.2021 05:10 KylieAnne

ABC Corp expects to have $4 per share earnings this coming year. ABC Corp plans to have retention ratio equals 100% for the next two years. For the subsequent two years, the firm will retain 50% of its earnings. It will then keep 80% for dividend payout ratio from that 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 ABC Corp’s share count remains constant and all earnings growth comes from the investment of retained earnings. a. Create a table to show: EPS growth rate, EPS, retention ratio, and dividend payout ratio for each year from year 0 to year 6. b. If ABC Corp’s equity cost of capital is 10%, what price would you estimate for ABC Corp stock?

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