Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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_2

Step: 3

blur-text-image_step3

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

The Bank Credit Analysis Handbook

Authors: Jonathan Golin, Philippe Delhaise

2nd Edition

ISBN: 0470821574, 978-0470821572

More Books

Students also viewed these Finance questions

Question

1. Give yourself plenty of time to eat and get to the exam room.

Answered: 1 week ago