Titanic Corporation has 10 million share outstanding, selling currently at a price of $50 per share....

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Titanic Corporation has 10 million share outstanding, sellingcurrently at a price of $50 per share. The company expects earningsper share next year to be $7.50. The company retains one-third ofeach year's earnings and reinvests these funds in projects with anexpected return of 15% (thus, ROE is 15%)
What Rate of return do the shareholders require?
Suppose that, unexpectedly, the company announces plans toretain an additional $3 per share for the next ten years. Theseadditional funds will be invested in ten separate perpetualprojects, each with an expected rate of return of 9%. The requiredrate of return on the new projects would be the same as the currentrequired return. As a result of this announcement. Titans Stockprice is?
Do you think Titanic is more of a growth company before or afterthis announcement?

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3.9 Ratings (384 Votes)

a Expected EPS E1 75 Retention Ratio Firm Retains onethird of each years earnings 13 and ROE 15 Expected Dividend D1 E1 x 1Retention Ratio 75 x 23 5 Expected Growth Rate g See Answer

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