Analysts expect that TexMex Restaurants Inc. (TMR) will report earnings of $20 million one year from...

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Analysts expect that TexMex Restaurants Inc. (TMR) will report earnings of $20 million one year from today. TMR's policy is to pay 60% of its earnings out in dividends (it paid its dividends already for this year). The company has 5,000,000 shares outstanding and the book value of its equity is $200 million. Its required rate of return is = 11.5%. Assume that the numbers above are representative of the foreseeable future. (a) What will the stock price be three years from now? (b) Suppose the board of directors decided to change the dividend policy and pay out 100% of TexMex's earnings (so TexMex would pay out the full $20 million in dividends next year and then maintain the new dividend policy forever). Would shareholders benefit from this decision? Analysts expect that TexMex Restaurants Inc. (TMR) will report earnings of $20 million one year from today. TMR's policy is to pay 60% of its earnings out in dividends (it paid its dividends already for this year). The company has 5,000,000 shares outstanding and the book value of its equity is $200 million. Its required rate of return is = 11.5%. Assume that the numbers above are representative of the foreseeable future. (a) What will the stock price be three years from now? (b) Suppose the board of directors decided to change the dividend policy and pay out 100% of TexMex's earnings (so TexMex would pay out the full $20 million in dividends next year and then maintain the new dividend policy forever). Would shareholders benefit from this decision?

Answer rating: 100% (QA)

a To determine the stock price three years from now we first need to find the expected dividends that will be paid out in years 1 2 and 3 Using the gi... View the full answer