Chapter 17 Problem 11

11. Payout Policy. Surf \& Turf Hotels is a mature business, although it pays no cash dividends. Next year's earnings are forecast at $56 million. There are 10 million outstanding shares. The company has traditionally used 50% of earnings to repurchase shares of stock and has reinvested the remaining earnings. With reinvestment, the company has generated steady growth averaging 5\% per year. Assume the cost of equity is 12%. (LO17-3) a. Calculate Surf \& Turf's current stock price, using the constant-growth DCF model from Chapter 7. (Hint: Take the easy route and start by calculating the total value of outstanding equity.) b. Now Surf \& Turf's CFO announces a switch from repurchases to a regular cash dividend. Next year's dividend will be $2.80 per share. The CFO reassures investors that the company will continue to pay out 50% of earnings and reinvest 50%. All future payouts will come as dividends, however. What would you expect to happen to Surf \& Turf's stock price? Ignore taxes