A company has just paid a dividend of $5 per share. The company has decided to...
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A company has just paid a dividend of $5 per share. The company has decided to reduce its dividend payout ratio to 80% and use the retained earnings to expand the business. The return on its investment from this expansion (ROE) is expected to be 14%. Assuming the risk does not change and the required return stays at 10%. a. What will the company stock price be today? Investors expect a 10% required return. b. The expansion opportunity has fallen through, so rather than reinvest the funds the company has decided to payout all of its earnings in dividends. The dividend is expected to be $5 per share. What will the company stock price be today? Investors expect a 10% required return. c. Does the change in price make sense from an investor perspective? A company has just paid a dividend of $5 per share. The company has decided to reduce its dividend payout ratio to 80% and use the retained earnings to expand the business. The return on its investment from this expansion (ROE) is expected to be 14%. Assuming the risk does not change and the required return stays at 10%. a. What will the company stock price be today? Investors expect a 10% required return. b. The expansion opportunity has fallen through, so rather than reinvest the funds the company has decided to payout all of its earnings in dividends. The dividend is expected to be $5 per share. What will the company stock price be today? Investors expect a 10% required return. c. Does the change in price make sense from an investor perspective?
Expert Answer:
Answer rating: 100% (QA)
a The dividend discount model must be used to compute the current stock price The formula is as follows P D r g Where P current stock price D dividend ... View the full answer
Related Book For
Fundamentals Of Corporate Finance
ISBN: 9781265553609
13th Edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan
Posted Date:
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