Question

Zeta Corp has 1,000 shares outstanding. Its stock is priced at $100 a share and

shareholders expect Zeta to pay dividends of $10 a year in perpetuity. Now the president suddenly announces that it will keep the total payout the same but will pay only a quarter of the total amount as dividends and use the remaining cash to buy back stock. What will happen to the share price now and how much will the share price grow each year?

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