Problems Stock Valuation and the DDM (2)

Lengefeld Manufacturing expects earnings per share of $2 and pays out all of its earnings as dividends. With no expectations for growth, the shares are currently valued at $24. The company is considering cutting the dividend payout to 50% and use retained earnings for new investment. The return on new investment is 15%. The risk is the same as existing investments and the cost of equity remains unchanged. What would be the price of the shares if they cut the dividend payout to 50%? Should they do it?

Polar Bear industries plans to pay dividends of $2, $7 and $4 over the next 3 years and will grow the dividend at a constant rate of 5.5% thereafter. If the cost of equity is 10%, what is the price of the stock today?

Suppose Frito Enterprises has 300 million total shares outstanding and expects to have earnings next year of $920 million. The company uses 40% of earnings for dividends and share repurchases (20% dividend payout and 20% for share repurchases). If earnings will grow at a constant rate of 8% and the cost of equity is 10%, calculate the price of the shares using the total payout model.

What is the growth rate of a company that is expected to pay a dividend of $1.00, has a current share price of $20 and has a cost of equity of 7%?