The Vinson Corporation has earnings of $500,000 with 250,000 shares outstanding. Its P/E ratio is 20. The
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The Vinson Corporation has earnings of $500,000 with 250,000 shares outstanding. Its P/E ratio is 20. The firm is holding $300,000 of funds to invest or pay out in dividends. If the funds are retained, the after-tax return on investment will be 15 percent, and this will add to present earnings. The 15 percent is the normal return anticipated for the corporation, and the P/E ratio would remain unchanged. If the funds are paid out in the form of dividends, the P/E ratio will increase by 10 percent because the stockholders in this corporation have a preference for dividends over retained earnings. Which plan will maximize the market value of the stock?
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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Foundations of Financial Management
ISBN: 978-1259194078
15th edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen