Rate of growth Wichman Products' stock is currently selling for $60 a share

Wichman Products' stock is currently selling for $60 a share. The firm is expected to earn $5.40 per share this year and to pay a year-end dividend of $3.60.

a. If investors require a 9 % return, what rate of growth must be expected for Wichman Products?

Investors require rate of return is ROE. Therefore, ROE is 9%. Then, we will find payout rate and calculate for the growth rate for Wichman Products.

Payout rate = $3.60/$5.40 x 100 = 66.67%

g= (1 - Payout rate)(ROE)
= (1 - 66.67%)(9%)
= 3.00%

b. If Wichman Products reinvests retained earnings in projects whose average return is equal to the stock's expected rate of return, what will be next year's EPS? [Hint: g= (1 - Payout rate)(ROE).]

$5.40 x 1.03 = $5.562