Problem:
In the past, Sunnyfax Publishing paid out all its earnings as dividends. When the stock market opened for trading today, Sunnyfax's share price was $38 and earnings for the year ending today are $3 per share. At the end of the day and after paying their $3 dividend, Sunnyfax surprises investors by announcing they will cut its dividend payout in future years from 100% to 66.67% and reinvest the retained funds. The rate of return on invested capital is expected to be 12%.
Required:
Question: If the reinvestment does not affect Sunnyfax's equity cost of capital, what is the expected share price as a consequence of this decision?
A. $26.34
B. $51.35
C. $53.40
D. $80.11
Note: Please show guided help with steps and answer.