RFK Limited expects earnings this year of $ $5\mathrm{.}04$ per$$ share, and it plans to pay a $ $2\mathrm{.}63$ dividend to shareholders. RFK will retain $ $2\mathrm{.}41$ per share of its earnings to reinvest in new projects which have an expected return of $15\mathrm{.}3\%$ per year. Suppose RFK will maintain the same dividend payout$$ 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$$ RFK$?$

b$.$ If$$ RFK$\text{'}$s equity cost of capital is $12\mathrm{.}9\%,$ what price would you estimate for RFK$$ shares?

c$.$ Suppose instead that RFK paid a dividend of $ $3\mathrm{.}63$ per share this year and retained only $ $1\mathrm{.}41$ per share in earnings. That$$ is$,$ it chose to pay a higher dividend instead of reinvesting in as many new projects. If RFK maintains this higher payout rate in the$$ future, what share price would you estimate for the firm$$ now? Should RFK follow this new$$ policy?

Question content area bottom

Part $1$

a$.$RFK$\text{'}$s growth rate of earnings is

$$

enter your response here$\%.($Round to one decimal$$ place.$)$

Part $2$

b$.$ If$$ RFK$\text{'}$s equity cost of capital is $12\mathrm{.}9\%,$ then$$ RFK$\text{'}$s share price will be $$$

$$

enter your response here. $($Round to the nearest$$ cent.$)$

Part $3$

c$.$ If RFK paid a dividend of $ $3\mathrm{.}63$ per share this year and retained only $ $1\mathrm{.}41$ per share in$$ earnings, then$$ RFK$\text{'}$s share price would be $$$

$$

enter your response here. $($Round to the nearest$$ cent.$)$

Part $4$

Should RFK follow this new$$ policy? $($Select the best choice$$ below.$)$

A$.$

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

B$.$

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

C$.$

$$No$,$ RFK should not raise dividends because companies should always reinvest as much as possible.

D$.$

$$No$,$ RFK should not raise dividends because the projects are positive NPV$.$