1. Suppose a firm has been earning a return on equity (ROE) of 12 percent and retaining 70 percent of its earnings (i.e. its dividend payout ratio is 30 percent). If this situation is expected to continue indefinitely, what would be a reasonable estimate of g, the company’s future growth rate in dividends?
2. You are bearish on Ford, and would like to short 100 shares. The current price is $14. What is your profit/loss if the share price declines to $10 and Ford paid 2 dividends of $0.15 each?