Question
Company A had $30 million in earnings last year. $10 million were used to buyback stocks and $6,5 million were distributed as dividends (this was
Company A had $30 million in earnings last year. $10 million were used to buyback stocks and $6,5 million were distributed as dividends (this was the payout policy until now). Next year's forecast for earnings is $31,5 million; 30% will be used to buyback stock and 15% to pay dividends (this new policy will remain forever). Assuming that last distribution occurred yesterday and new payout policy was publicized today, what is the expected increase in share price due to the announcement about new payout policy? Assume that cost of capital is 10%.
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