June 5, 2015, Question 2

You will know from my free lectures that shareholders determine the market value, and that they determine it based on the growth rate in dividends that they are expecting. Also from my free lectures you will know that the growth rate ir r x b where r is the return on reinvestment. We only assume that this is equal to Re where there is no other information. Shareholders will not know what the cost of equity to the company is! Having said this, you would still get credit for what you have done (since would be a Section C question in the current format of the exam).