The CEO at Yolo Co. has implemented a new growth plan, which cuts the dividend to $1.50 and reinvest the rest in a high-growth investment. The company has just paid a dividend of $1.50 and will keep its dividend at $1.50 per share next year as well. In subsequent years, it will target 40% dividend payout ratio. Yolo just reported earnings per share (EPS) of $4 this year. The return on new investment is 16% and the company's equity cost of capital is 12%.


a. What is Yolo's growth rate and expected EPS at the end of Year1?
b. At the end of Year 2?
c. What is the growth rate of the earnings for the subsequent years?
d. Find Yolo's current stock price under the new plan.

Answer rating: 100% (QA)

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