Problem 5 (8 Marks)

Fiber-One Telecommunications Ltd. has a debt-to-equity ratio of 0.67 and has 420,000 shares of $2 par value stock outstanding. The company forecasts that its rapid growth rate will no longer continue and it will have fewer attractive investment opportunities in the future.Previously, Fiber-One's average annual growth was 10%.Going forward, growth is forecasted to be 3%.Because of the lower growth rate, new investments which meet the 15% required return of shareholders, would amount to only $720,000 for 2013 in comparison to $1,800,000 in projected net income.Based on the existing 20% dividend payout ratio, retained earnings would be $1,440,000 in 2013, but as noted, investments would total only $720,000.

The high earnings from existing assets are expected to continue and net income of $1,800,000 is still expected for 2013.Due to the reduced investment opportunities, Fiber-One is reviewing its dividend policy.

(a)Assuming all acceptable 2013 investment projects can be financed by earnings retained during the year, calculate DPS in 2013, assuming the company uses the residual distribution model and pays all distributions in the form of dividends.(3 marks)

(b)Based on your answer in part a, what will be the firm's payout ratio?(1 mark)

(c)If a 76% payout ratio is maintained for the foreseeable future, what is your estimate of the current stock price?How does this compare with the stock price if Fiber-One continued its previous rapid growth rate?(4 marks)

Could you help me solve this problem and show all steps?