Problem:
Spencer Supplies's stock is currently selling for $60 per share. The firm is expected to earn $5.10 per share this year and to pay a year-end dividend of $3.70.
a) If investors require a 8.5% return, what rate of growth must be expected for Spencer?
b) If Spencer reinvests earnings in projects with average returns equal to the stock's expected rate of return, then what will be next year's EPS? (Hint: g = ROE × Retention ratio.). Justify your answer with the appropriate computations.