1. Electric Car expects to have earnings per share of $5 in 2020. The firm plans...

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1. Electric Car expects to have earnings per share of $5 in2020. The firm plans to pay all of its earnings as dividends.Electric Car’s current share price is $50.
A. Suppose Electric Car continues earning $5 per share annuallyin 2021-2026 and could cut its dividends payout rate to 75% duringthis period. Electric Car is planning to apply the retainedearnings to open new stores. The return on investment in thesestores is expected to be 12%. Assume that the risk of the newinvestments is the same as the risk of existing investments. Whateffect would this new dividend payout policy have on Electric Car’sshare price in 2020?
B. Suppose Electric Car decided to cut its dividend payout rateto 75% to invest in new stores, yet now suppose that the return onthese new investments is 8%, rather than 12%. Given its expectedearnings per share this year of $5 and same cost of capital(return) as in A., what will happen to Electric Car’s share pricein 2020?

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In the given question the following information is given EPS 5 DPS 5 since all the earnings are distributed as dividend Current share price P0 50 Part I First of all we calculate the cost of equity Ke with the See Answer

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1. Electric Car expects to have earnings per share of $5 in2020. The firm plans to pay all of its earnings as dividends.Electric Car’s current share price is $50.A. Suppose Electric Car continues earning $5 per share annuallyin 2021-2026 and could cut its dividends payout rate to 75% duringthis period. Electric Car is planning to apply the retainedearnings to open new stores. The return on investment in thesestores is expected to be 12%. Assume that the risk of the newinvestments is the same as the risk of existing investments. Whateffect would this new dividend payout policy have on Electric Car’sshare price in 2020?B. Suppose Electric Car decided to cut its dividend payout rateto 75% to invest in new stores, yet now suppose that the return onthese new investments is 8%, rather than 12%. Given its expectedearnings per share this year of $5 and same cost of capital(return) as in A., what will happen to Electric Car’s share pricein 2020?