7. ABC, Inc. is expected to earn $6.00 a share next year. The firm's shareholders have a required rate of return of 12 percent.

What would ABC's stock price be if it retained 40 percent of its earnings and invested them in projects earning 12 percent? What would the stock price be if the retention rate was increased to 60 percent and the ROE stayed at 12 percent?(4 points)

Suppose that ABC can earn 15 percent on all new investments. What would the stock price be if it retained 40 percent of its earnings? What would the stock price be if the earnings retention rate was increased to 60 percent? (4 points)