Problem 5.5. Remittance Inc. has 1.8 million shares of common stock outstanding, currently trading at $45 per share. In one year Remittance will pay a dividend of $6.30 per share. The return on equity has been estimated at 19%.

a. Suppose the number of shares remains constant. Calculate the net payout to shareholders at year 1. Also estimate the share price and value of equity at year 1.

b. Suppose that Remittance reduces the year 1 dividend and uses the cash to repurchase 100,000 shares at year 1. Calculate the share price and dividend per share at year 1. Also calculate the dividend yield and rate of capital gain.

The solution key says:

a. C_E1 = 11.3400; P₁ = $47.2500; E₁ = 85.0500

b. P₁ = $50.0294; Div₁ = $3.5206; DY = 0.0782; RCG = 0.1118