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) $15
B) $2
C) $7.50
D) $20
E) $11.25
.
If ROE - rS- then a company will increase shareholder value (stock pri.docx
1. 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) $15
B) $2
C) $7.50
D) $20
E) $11.25
