In recent years, Sears, Roebuck & Co has paid out only 32% of its earn

In recent years, Sears, Roebuck & Co has paid out only 32% of its earnings in dividends. Retained earnings have been invested in expansion projects that have yielded an average ROE of 20%.

If Sears’ cost of equity capital is 16% and next year’s expected dividend is $1 per share, compute the value of Sears’ shares using the constant dividend growth model as interpreted through the sustainable growth model.
a. $5.01
b. $9.87
c. $20.47
d. $41.67
FORMULAS: g=bk; V=Dt/(r-g)

ANSWER

D