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Part $1$

DFBDFB$,$

$$Inc$.,$ expects earnings at the end of this year of

$$$$5\mathrm{.}005\mathrm{.}00$

per$$ share, and it plans to pay a

$$$$3\mathrm{.}003\mathrm{.}00$

dividend at that time.

DFBDFB

will retain

$$$$2\mathrm{.}002\mathrm{.}00$

per share of its earnings to reinvest in new projects with an expected return of

$15\mathrm{.}0\%15\mathrm{.}0\%$

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

$12\mathrm{.}0\%12\mathrm{.}0\%,$

what price would you estimate for

DFBDFB

stock$$ today?

c$.$ Suppose

DFBDFB

instead paid a dividend of

$$$$4\mathrm{.}004\mathrm{.}00$

per share at the end of this year and retained only

$$$$1\mathrm{.}001\mathrm{.}00$

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?