Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

RFK Limited expects earnings this year of $5.62 per share, and it plans to pay a $4.10 dividend to shareholders. RFK will retain $1.52 per

image text in transcribed

RFK Limited expects earnings this year of $5.62 per share, and it plans to pay a $4.10 dividend to shareholders. RFK will retain $1.52 per share of its earnings to reinvest in new projects which have an expected return of 15.6% 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 REK? b. If RFK's equity cost of capital is 11.9%, what price would you estimate for RFK shares? c. Suppose instead that RFK paid a dividend of $5.10 per share this year and retained only $0.52 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? a. RFK's growth rate of earnings is %. (Round to one decimal place.) b. If RFK's equity cost of capital is 11.9%, then RFK's share price will be $1. (Round to the nearest cent.) c. If RFK paid a dividend of $5.10 per share this year and retained only $0.52 per share in earnings, then REK's share price would be $ (Round to the nearest cent.) Should RFK follow this new policy? (Select the best choice below.) O A. Yes, RFK should raise dividends because, according to the dividend-discount model, doing so will always improve the share price. O B. No, RFK should not raise dividends because companies should always reinvest as much as possible. OC. Yes, RFK should raise dividends because the return on new investments is lower than the cost of capital. OD. No, RFK should not raise dividends because the projects are positive NPV

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Project Financing Asset-Based Financial Engineering

Authors: John D Finnerty

3rd Edition

1118421841, 9781118421840

More Books

Students also viewed these Finance questions