ABC Inc. expects to have earnings per share of $6 in the coming year. Rather than...
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ABC Inc. expects to have earnings per share of $6 in the coming year. Rather than reinvest these earnings and grow, the firm plans to pay out all its earnings as a dividend (payout rate of 100%) and could maintain this level of dividends forever in the future. With these expectations of no growth, ABC's current share price is $60. Suppose ABC Inc could cut its dividend payout rate to 75% for the foreseeable future and use the retained earnings to open new stores. The return on its investment in these stores is expected to be 12%. Assuming its equity cost of capital remains unchanged, what will be the stock price under this policy? ABC Inc. expects to have earnings per share of $6 in the coming year. Rather than reinvest these earnings and grow, the firm plans to pay out all its earnings as a dividend (payout rate of 100%) and could maintain this level of dividends forever in the future. With these expectations of no growth, ABC's current share price is $60. Suppose ABC Inc could cut its dividend payout rate to 75% for the foreseeable future and use the retained earnings to open new stores. The return on its investment in these stores is expected to be 12%. Assuming its equity cost of capital remains unchanged, what will be the stock price under this policy?
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To calculate the stock price under the new policy we need to consider the present value of the futur... View the full answer
Related Book For
Fundamentals Of Corporate Finance
ISBN: 9780135811603
5th Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Posted Date:
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