You currently work for a firm that has investment capital per share equal to $10

Question

You currently work for a firm that has investment capital per share equal to $100.This firm currently enjoys an annual return on capital of 15 percent. The cash flows generated by this capital occur at the end of the year (or the beginning of the next year) and are risky. In fact, effective annual required rate of return given the riskiness of these cash flows is .104 (i.e., 10.4 percent per annum).

Your firm currently has a policy of paying all cash flows out as a dividend. That is, its payout ratio is 100 percent (or equivalently, the plowback ratio is zero).

Explanation / Answer

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