Question
Crab and Apple Co expects that next year's earnings will be eight dollars per share (EPS1 = $8). The company normally pays out 80% of
Crab and Apple Co expects that next year's earnings will be eight dollars per share (EPS1 = $8). The company normally pays out 80% of its earnings in dividends to its shareholders and plans to continue that practice. The company's financial staff expects that reinvested funds used in its capital spending program can earn a return on equity of 25%. Given the company's level of risk, shareholders demand a 20% required rate of return. Please help Mr. Gordon to determine the stock price.
b) ****News Flash**** The company just announced that it is changing its dividend policy and the payout ratio next year will be 30%. What happens to the stock price?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
To determine the stock price of Crab and Apple Co we can use the Gordon Growth Model Given informati...
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Financial management theory and practice
Authors: Eugene F. Brigham and Michael C. Ehrhardt
13th edition
1439078106, 111197375X, 9781439078105, 9781111973759, 978-1439078099
