DFB$,$Inc$.,$ expects earnings at the end of this year of $$$$4\mathrm{.}054\mathrm{.}05$ per$$ share, and it plans to pay a $$$$2\mathrm{.}982\mathrm{.}98$ dividend at that time. DFBDFB will retain $$$$1\mathrm{.}071\mathrm{.}07$ per share of its earnings to reinvest in new projects with an expected return of $15\mathrm{.}4\%15\mathrm{.}4\%$ per year. Suppose DFBDFB will maintain the same dividend payout$$ rate, retention$$ rate, and return on new investments in the future and will not change its number of outstanding shares.

a$.$ What growth rate of earnings would you forecast for DFBDFB$?$

b$.$ If DFBDFB$\text{'}$s equity cost of capital is $11\mathrm{.}6\%11\mathrm{.}6\%,$ what price would you estimate for DFBDFB stock$$ today?

c$.$ Suppose DFBDFB instead paid a dividend of $$$$4\mathrm{.}274\mathrm{.}27$ per share at the end of this year and retained only $$$negative $0\mathrm{.}220\mathrm{.}22$ per share in earnings. That$$ is$,$ it chose to pay a higher dividend instead of reinvesting in as many new projects. If DFBDFB maintains this higher payout rate in the$$ future, what stock price would you estimate$$ now? Should DFBDFB raise its$$ dividend?

Question content area bottom

Part $1$

a$.$ What growth rate of earnings would you forecast for DFBDFB$?$