Alan is getting nervous about his stock holding in CraneCo. He bought the stock 11 years ago at $20 per share and the price is now $83.50 per share. CraneCo. has a policy of paying out 25 percent of its earnings in dividends and Alan expects the company to continue earning a 12 percent return on equity. Over the past 12 months, CraneCo. paid $2.75 per share in dividends. Assume the discount rate for CraneCo. is 14%. a. Based on Alan’s projections, is the stock overpriced at $83.50 per share? b. Assume Alan’s projections are correct. Should the firm increase or decrease their payout ratio? Explain your answer.

Answer rating: 100% (QA)

Current Annual Dividend 275 Discount Rate 14 Return on Equity ROE 12 and Dividend PAyout Ra... View the full answer