Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

DFB , Inc., expects earnings at the end of this year of $ 5 per share, and it plans to pay a $ 3 dividend

DFB, Inc., expects earnings at the end of this year of $5 per share, and it plans to pay a $3 dividend at that time. DFB will retain $2 per share of its earnings to reinvest in new projects with an expected return of 15% per year. Suppose DFB will maintain the same dividend payout rate, retention rate, and return on new investments in the future and will not change its number of outstanding shares.
a) What growth rate of earnings would you forecast for DFB?
b) If DFB's equity cost of capital is 12%, what price would you estimate for DFB stock today?
c) Suppose DFB instead paid a dividend of $4 per share at the end of this year and retained only $1 per share in earnings. If DFB maintains this higher payout rate in the future, what stock price would you estimate now? Should DFB raise its dividend?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Monetary Policy And Public Finance

Authors: G. C. Hockley

1st Edition

1138704792, 978-1138704794

More Books

Students also viewed these Finance questions