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Analysts expect MC, Co. to maintain a dividend payout ratio of 35% and enjoy an expected growth rate of 12% per year for the next 5 years. After the fifth year, all earnings will be paid out as dividends. The required rate of return on MC, Co equity is 8%.

a. Given that the last dividend paid was $0.5 and the current market price of the stock is $15, what growth rate does the market expect for MC, Co?

b. At what price would the analysts value the stock under their own expectations?

c. Suppose 5 years have gone by and the company has to make a decision on how to move forward. It can either pay out all earnings as dividends without considering any growth opportunities, or choose a growth strategy where the company will expand into new lines of business in global markets. If the management chooses this strategy, the payout ratio will be reduced down to 20% from 35%, and the company will be able to maintain a growth rate of 7% forever. Which strategy should the management choose to maximize shareholder value?

Answer rating: 100% (QA)

Note The third question shows things after 5 years however final decision wo... View the full answer