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3) a. If $1.25 represents a 40% dividend payout ratio, earnings per share are $3.13. A six percent return (the required return) would put future earnings at $3.32. ((3.32-3.13)*100)/3.13 = 6.07%

b. 40% (the dividend payout ratio) of $3.32 (future estimated earnings) is $1.33

c. The price of the stock cannot be calculated accurately with the information given, however if its is assumed that the earnings per share (currently $3.13 with dividends of $1.25 and a dividend payout ratio of 40%) represent the 20% return on equity, then the price is simply five times the earnings per share, or $15.65.

d. assuming the dividend payout ratio and return on equity remain constant at 40% and 20% throughout this period, a and the same relationship for the ROE and stock price, in the first year, a dividend of $2 means EPS increases to $5, translating to a stock price of...
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