Assume that discount rate (capitalization rate) is 10% and a company pays all of its earnings as dividends which amounts to $1500 per share.
a. Find the current stock price.
b. What will happen to the stock price if the company managers think that there are good investment opportunities and retain 90% of the earnings (plowback ratio) when the return on equity of the stock is ROE=0.18?.
c. Why do you think the stock price increase, when the dividends paid to investors decrease?