DFB, Inc.,expects earnings this year of $4.73 per share, and it plans to pay a $2.89 dividend to shareholders. DFB will retain $1.84 per share of its earnings to reinvest in new projects that have an expected return of 15.8% 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. Assume next dividend is due in one year.

(a) What growth rate of earnings would you forecast for DFB?

(b) If DFB's equity cost of capital is 12.4%, what price would you estimate for DFB stock?

(c) Suppose instead that DFB paid a dividend of $3.89 per share this year and retained only $0.84 per share in earnings. If DFB maintains this higher payout rate in the future, what stock price would you estimate for the firm now? Should DFB follow this new policy?

If DFB paid a dividend of $3.89 per share next year and retained only $0.84 per share in earnings, then DFB's stock price would be $__________

Should DFB follow this new policy? select the best choice below

A. No. DFB should not raise dividends because companies should always reinvest as much as possible.

B. Yes, DFB should raise dividends because, according to the dividend-discount model, doing so will always improve the share price.

C. Yes, DFB should raise dividends because the return on new investments is lower than the cost of capital.

D. No, DFB should not raise dividends because the projects are postive NPV.