Crecimiento S.A. currently plows back 40 percent of its earnings and earns a return of 20 percent

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Crecimiento S.A. currently plows back 40 percent of its earnings and earns a return of 20 percent on this investment. The dividend yield on the stock is 4 percent.

a. Assuming that Crecimiento can continue to plow back this proportion of earnings and earn a 20 percent return on the investment, how rapidly will earnings and dividends grow? What is the expected return on Crecimiento stock?

b. Suppose that management suddenly announces that future investment opportunities have dried up. Now Crecimiento intends to pay out all its earnings. How will the stock price change?

c. Suppose that management simply announces that the expected return on new investment would in the future be the same as the market capitalization rate. Now what is Crecimiento’s stock price?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...

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a We know that g the growth rate of dividends and earnings is given by g plowback ratio ROE g 040 02...View the full answer

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Principles of Corporate Finance

ISBN: 978-0072869460

7th edition

Authors: Richard A. Brealey, Stewart C. Myers

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Question Posted: Jun 08, 2011 03:53 AM

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Crecimiento S.A. currently plows back 40 percent of its earnings and earns a return of 20 percent

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a We know that g the growth rate of dividends and earnings is given by g plowback ratio ROE g 040 02...View the full answer

Principles of Corporate Finance

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