Surf & Turf Hotels is a mature business, although it pays no cash dividends. Next year's earnings

Question:

Surf & Turf Hotels is a mature business, although it pays no cash dividends. Next year's earnings are forecast at $56 million. There are 10 million outstanding shares. The company has traditionally used 50% of earnings to repurchase shares of stock and reinvested the remaining earnings. With reinvestment, the company has generated steady growth averaging 5% per year. Assume the cost of equity is 12%.

a. Calculate Surf & Turf's current stock price, using the constant-growth DCF model from Chapter 7.

b. Now Surf & Turf's CFO announces a switch from repurchases to a regular cash dividend. Next year's dividend will be $2.80 per share. The CFO reassures investors that the company will continue to pay out 50% of earnings and reinvest 50%. All future payouts will come as dividends, however. What would you expect to happen to Surf & Turf's stock price? Ignore taxes.

Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...