Question
DFB, Inc., expects earnings this year of $ 4.62 per share, and it plans to pay a $ 2.53 dividend to shareholders. DFB will retain
DFB, Inc., expects earnings this year of $ 4.62 per share, and it plans to pay a $ 2.53 dividend to shareholders. DFB will retain $ 2.09 per share of its earnings to reinvest in new projects with an expected return of 15.5 % 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 12.9 % , what price would you estimate for DFB stock? c. Suppose DFB instead paid a dividend of $ 3.53 per share this year and retained only $ 1.09 per share in earnings. That is, it chose to pay a higher dividend instead of reinvesting in as many new projects. If DFB maintains this higher payout rate in the future, what stock price would you estimate now? Should DFB follow this new policy?
A,B,C answer!
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started