P10-12 Spencer Supplies stock is currently selling for $60 a share. The firm is expected to earn $5.40 per share this year and to pay a year-end dividend of $3.60.
Intermediate Financial Management By Eugene F. Brigham, Philip R. Daves
a. If investors require a 9% return, what rate of growth must be expected for Spencer?
b. If Spencer reinvests earnings in projects with average returns equal to the stock’s expected rate of
return, what will be next year’s EPS? [Hint: g=ROE (Retention ratio).]
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