The stock of Nogro Corporation is currently selling for $16 per share. Earnings per share in the coming year are expected to be $2.60. The company has a policy of paying out 40% of its earnings each year in dividends.
The rest is retained and invested in projects that earn a 20% rate of return per year. This situation is expected to continue indefinitely.
a. Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of return do Nogro's investors require? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) Rate of return
b. By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested?