If ROE > rS, then a company will increase shareholder value (stock price will go up) when retaining earnings and reinvesting them within the company. Assume a firm has ROE = 20% and rS=15%. Next period's earnings (E1) will be $8 per share. Calculate the share price if the firm retains 25% of its earnings (and pays out 75% as a dividend). 

Calculate the share price if the firm retains 50% of its earnings (and pays out 50% as a dividend). What is the difference in price?

Answer rating: 100% (QA)

To calculate the share price we can use the Gordon Growth Model P D1 E1 x retention ratio rS ... View the full answer