Question: Bob & Sue Realty (BSR) is a publicly traded REIT that has no debt and a current dividend yield of 8%, with a current share price/earnings multiple of 12.5. The current consensus expectation among stock analysts who follow BSR is that BSR can provide a long-term average growth rate in its dividends per share of 5% per year.
a. What is BSR's plowback ratio (i.e., what proportion of its earnings does it retain and not pay as dividends)?
b. Assuming the stock market agrees with these analysts expectations, what is BSR's firm level average cost of capital?