Problem:
James Farnsworth Tuttle, founder and holder of the controlling interest in Tuttle Inc., has vowed that his firm will never pay a dividend as long as he lives. His current life expectancy is 10 years. Starting one year after his death, it is estimated that Tuttle Inc. could pay a constant dividend of $40 per share forever. Alternatively, the company is capable of paying a constant dividend of $10 per share forever, starting one year from now. Investors require a 20% rate of return on Tuttle Stock.
Required:
Question 1: What is the current value of a Tuttle share under Tuttle's management?
Question 2: What would be the price per share if the alternative policy were implemented?
Question 3: Under Tuttle's policy, what (constant) rate of return is being earned on the retained dividends (to the nearest percent)?
Note: Please provide reasons to support your answer.