Assume that the ABC Company is earning $2 currently, is paying an $0.80 dividend, and will continue to have a 40-percent dividend payout policy in the future. All reinvested funds will earn 0.08. The stockholders require a 0.10 return on their investment and are not taxed.

a. What is the value of a share of common stock?

b. What would the value be if the optimal dividend strategy was followed and a $2 dividend could be maintained?

c. If reinvested funds could earn 0.15, what would be the value of a share of common stock with the 40-percent payout policy?

d. What would you expect to happen to r if more funds were reinvested?