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Crane Sporting Goods expects to have earnings per share of $6 in the coming year. Rather than reinvest these earnings and grow, the firm plans
Crane Sporting Goods expects to have earnings per share of $6 in the coming year. Rather than reinvest these earnings and grow, the firm plans to pay out all of its earnings as a dividend. With these expectations of no growth, Crane's current share price is $60 and the cost of equity capital is 10%. Suppose Crane could cut its divident payout rate to 75% for the foreseeable future and use the retained earnings to open new stores. The return on investment in these stores is expected to be 12%. if we assume that the risk of these new investments is the same as the risk of its existing investments, then the firm's equity cost of capital is unchanged. What effect would this new policy have on Crane's stock price? O A. Increase because dividend payout rate drops to 75%. O B. Increase because return on new investment is great than the cost of equity capital. O C. Does not change. O D. Decrease because retention rate increase to 25%
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