6. Problem 15.08 (Alternative Dividend Policies)

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Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $0.65 out of annual earnings per share of $3.00. Currently, Rubenstein Bros.' stock is selling for $33.00 per share. Adhering to the company's target capital structure, the firm has $8 million in total invested capital, of which 40% is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of 18%, which is expected to continue this year and into the foreseeable future.

1. Based on this information, what long-run growth rate can the firm be expected to maintain? (Hint: g = Retention rate ROE.) Do not round intermediate calculations. Round your answer to two decimal places.
   %


2. What is the stock's required return? Do not round intermediate calculations. Round your answer to two decimal places.
   %


3. If the firm changed its dividend policy and paid an annual dividend of $1.30 per share, financial analysts would predict that the change in policy will have no effect on the firm's stock price or ROE. Therefore, what must the firm's new expected long-run growth rate? Do not round intermediate calculations. Round your answer to two decimal places.
   %
   
   If this plan is implemented, what must the firm's required return be? Do not round intermediate calculations. Round your answer to two decimal places.
   %


4. Suppose instead that the firm has decided to proceed with its original plan of disbursing $0.65 per share to shareholders, but the firm intends to do so in the form of a stock dividend rather than a cash dividend. The firm will allot new shares based on the current stock price of $33.00. In other words, for every $33.00 in dividends due to shareholders, a share of stock will be issued. How large will the stock dividend be relative to the firm's current market capitalization? (Hint: Remember market capitalization = P0 number of shares outstanding.) Do not round intermediate calculations. Round your answer to two decimal places.
   %


5. If the plan in part d is implemented, how many new shares of stock will be issued? Do not round intermediate calculations. Round your answer to the nearest whole number.
   shares
   
   If the plan in part d is implemented, by how much will the company's earnings per share be diluted? Do not round intermediate calculations. Round your answer to the nearest cent.
   $ per share

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