Dick's, a sporting goods store, expects to have earnings per share of $3 in the coming year. The firm plans to pay out all of its earnings as a dividend. There is no expectation of growth. Dick's current share price is $60. What is Dick's equity cost of capital?

Select one:

a.%10

b.%20

c.%5

d.%2

e.%6.5

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Question5

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Dick's decides to cut its dividend payout rate 50% (to $1.50) indefinitely. The new retained earnings will be used to open new stores earning 8% on the investment. With an equity cost of capital from the previous question, what is the new price of Dick's stock?

Select one:

a.37.50

b.60

c.100

d.150

e.180

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Question6

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Dick's discovers that instead of 8% the new stores earned 2% on the investment. What is their new stock price?

Select one:

a.37.50

b.60

c.100

d.150

e.180

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Question7

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What would you conclude about Dick's investment if it only earns 2%?

Select one:

a.It has a positive NPV since the return is positive.

b.It has an IRR that is greater than the equity cost of capital.

c.It has a short payback.

d.It has a negative NPV since the new stock price is lower.

e.It is a worthy diversfying investment.