PQR Corporation expects to have earnings this coming year of $3 per share (year 1). It plans to retain all of its earnings for the next two years (year 1 and year 2). For the subsequent two years (year 3 and year 4), the firm will retain 50% of its earnings. It will then retain 20% of its earnings from that point onward. Each year, retained earnings will be invested in new projects with anexpected return of 25% per year. Any earnings that are not retained will be paid out as dividends. Assume PQR's share count remains constant and all earnings growth comes from reinvestment ofretained earnings. 4.1) Project dividends for years 1 to 6. 4.2) If PQR's equity cost of capital is 10%, what price would you estimate for PQR's stock?

For Years 1 and 2, earnings are reinvested, so there are no dividends. Starting Year 3, we'll…

Answered: PQR Corporation expects to have…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter4: Financial Planning And Forecasting

Section: Chapter Questions

Problem 9P

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