Titanic Corporation has 10 million share outstanding, selling currently at a price of $50 per share. The company expects earnings per share next year to be $7.50. The company retains one-third of each year's earnings and reinvests these funds in projects with an expected return of 15% (thus, ROE is 15%)
What Rate of return do the shareholders require?
Suppose that, unexpectedly, the company announces plans to retain an additional $3 per share for the next ten years. These additional funds will be invested in ten separate perpetual projects, each with an expected rate of return of 9%. The required rate of return on the new projects would be the same as the current required return. As a result of this announcement. Titans Stock price is?
Do you think Titanic is more of a growth company before or after this announcement?
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