(Measuring growth) Solarpower Systems earned$20per share at the beginning of the year and paid out$9in dividends to shareholders (so,D0=$9)and retained$11to invest in new projects with an expected return on equity of19percent. In the future, Solarpower expects to retain the same dividend payout ratio, expects to earn a return of19percent on its equity invested in new projects, and will not be changing the number of shares of common stock outstanding. a. Calculate the future growth rate for Solarpower's earnings.b. If the investor's required rate of return for Solarpower's stock is15percent,what would be the price of Solarpower's common stock?c. What would happen to the price of Solarpower's common stock if it raised its dividends to$13and then continued with that same dividend payout ratio permanently? Should Solarpower make this change? (Assume that the investor's required rate of return remains at15percent.)d. What would happened to the price of Solarpower's common stock if it lowered its dividends to$3and then continued with that same dividend payout ratio permanently? Does the constant dividend growth rate model work in this case? Why or why not? (Assume that the investor's required rate of return remains at15percent and that all future new projects will earn19percent.) Question content area bottomPart 1a. What is the future growth rate for Solarpower's earnings? enter your response here% (Round to two decimal places.)Part 2b. If the investor's required rate of return for Solarpower's stock is15%,what would be the price of Solarpower's common stock? $enter your response here (Round to the nearest cent.)Part 3c. What would happen to the price of Solarpower's common stock if it had raised its dividends to$13(D0=$13)and then continued with that same dividend payout ratio permanently? $enter your response here (Round to the nearest cent.)Part 4Should Solarpower make this change? (Select from the drop-down menus.) Solarpower▼ shouldshould notraise its dividend because the retention ratio will▼ increasedecreaseand the value of the common stock will▼ increasedecrease.Part 5d. What would happen to the price of Solarpower's common stock if it had lowered its dividends to$3(D0=$3)and then continued with that same dividend payout ratio permanently? $enter your response here (Round to the nearest cent.)Part 6Does the constant dividend growth rate model work in this case? Why or why not? (Select the best choice below.) A.No, the constant dividend growth rate model does not work in this case where the required return on the stock is less than the projected growth rate because it is not possible for a firm to grow at such an unsustainable lower rate while the enviroment that houses it can only grow at a higher rate. B.No, the constant dividend growth rate model does not work in this case where the required return on the stock is greater than the projected growth rate because it is not possible for a firm to grow at such an unsustainable higher rate while the enviroment that houses it can only grow at a lower rate. C.Yes, the constant dividend growth rate model works in this case where the required return on the stock is less than the projected growth rate because the firm's value will become negative when the ecomony that houses it experiences a substantial higher growth rate. D.Yes, the constant dividend growth rate model works in this case where the required return on the stock is greater than the projected growth rate because the firm's value will become negative when the ecomony that houses it experiences a substantial lower growth rate.

Question

(Measuring growth)  Solarpower Systems earned​$20per share at the beginning of the year and paid out​$9in dividends to shareholders​ (so,D0=$9​)and retained​$11to invest in new projects with an expected return on equity of19percent. In the​ future, Solarpower expects to retain the same dividend payout​ ratio, expects to earn a return of19percent on its equity invested in new​ projects, and will not be changing the number of shares of common stock outstanding. a.  Calculate the future growth rate for​ Solarpower's earnings.b.  If the​ investor's required rate of return for​ Solarpower's stock is15percent​,what would be the price of​ Solarpower's common​ stock?c.  What would happen to the price of​ Solarpower's common stock if it raised its dividends to​$13and then continued with that same dividend payout ratio​ permanently? Should Solarpower make this​ change? ​ (Assume that the​ investor's required rate of return remains at15percent​.)d.  What would happened to the price of​ Solarpower's common stock if it lowered its dividends to​$3and then continued with that same dividend payout ratio​ permanently? Does the constant dividend growth rate model work in this​ case? Why or why​ not? ​ (Assume that the​ investor's required rate of return remains at15percent and that all future new projects will earn19​percent.)   Question content area bottomPart 1a.  What is the future growth rate for​ Solarpower's earnings? enter your response here​%​ (Round to two decimal​ places.)Part 2b.  If the​ investor's required rate of return for​ Solarpower's stock is15​%,what would be the price of​ Solarpower's common​ stock? ​$enter your response here​ (Round to the nearest​ cent.)Part 3c.  What would happen to the price of​ Solarpower's common stock if it had raised its dividends to​$13​(D0​=​$13​)and then continued with that same dividend payout ratio​ permanently?   ​$enter your response here​ (Round to the nearest​ cent.)Part 4Should Solarpower make this​ change?  ​(Select from the​ drop-down menus.) Solarpower▼ shouldshould notraise its dividend because the retention ratio will▼ increasedecreaseand the value of the common stock will▼ increasedecrease.Part 5d.  What would happen to the price of​ Solarpower's common stock if it had lowered its dividends to​$3​(D0​=​$3​)and then continued with that same dividend payout ratio​ permanently? ​$enter your response here​ (Round to the nearest​ cent.)Part 6Does the constant dividend growth rate model work in this​ case? Why or why​ not?  ​(Select the best choice​ below.)  A.​No, the constant dividend growth rate model does not work in this case where the required return on the stock is less than the projected growth rate because it is not possible for a firm to grow at such an unsustainable lower rate while the enviroment that houses it can only grow at a higher rate. B.​No, the constant dividend growth rate model does not work in this case where the required return on the stock is greater than the projected growth rate because it is not possible for a firm to grow at such an unsustainable higher rate while the enviroment that houses it can only grow at a lower rate. C.​Yes, the constant dividend growth rate model works in this case where the required return on the stock is less than the projected growth rate because the​ firm's value will become negative when the ecomony that houses it experiences a substantial higher growth rate. D.​Yes, the constant dividend growth rate model works in this case where the required return on the stock is greater than the projected growth rate because the​ firm's value will become negative when the ecomony that houses it experiences a substantial lower growth rate.

Accepted Answer

Dividend discount model refers to a stock valuation model which is used by the company for…