DFB , Inc . , expects earnings at the end of this year of $ 4 .
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Question:
DFBInc expects earnings at the end of this year of $ per share, and it plans to pay a $ dividend at that time. DFBDFB will retain $ per share of its earnings to reinvest in new projects with an expected return of 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 DFBDFBs equity cost of capital is what price would you estimate for DFBDFB stock today?
c Suppose DFBDFB instead paid a dividend of $ per share at the end of this year and retained only $negative 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?
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