Dividend payout = 1 − earnings retention rate = 1 − 0.4 = 0.6
RS = Rf + β(RM − Rf) = 0.06 + 1.2(0.11 − 0.06) = 0.12
g = (retention rate)(ROE) = (0.4)(0.12) = 0.048
D1 = E1 × payout ratio = $4.00 × 0.60 = $2.40
Price = D1 / (k – g) = $2.40 / (0.12 – 0.048) = $33.32
