Problem:
IBM Corp. earned $8.80 in EPS last year. IBM has recently adopted a long-term target to pay out 40% of all future earnings as dividends. IBM's dividends and earnings are expected to grow at a constant rate of 4% in the future. You require a 10% rate of return on stock investments of similar risk.
Required:
Question: What is your estimate of the market value of IBM stock? Based on the information in problem previous problem, what will the value of IBM stock be if their payout rate changes to 60% next year, and the return on new investment (ROE*) is 12%?
Note: Please show how you came up with the solution.