Problem: Two retail corporations, both equity financed with no debt,are essentially in the same business. However, whereas one of the corporations has a stable earnings and dividendrecord, paying out all its earnings in dividends, the other is a growth stockincreasing its earnings and dividends annually through a different managementstrategy. The current dividend is $5 pershare for both corporations. The stablecorporation's stock trades for $40 per share, whereas the price of the growthstock is $50.
Required:
Question 1: Estimate the investors' required rate of return onthese stocks
Question 2: Estimate the steady future growth rate of the growingcorporation as perceived by the market.