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Skoonz, Inc. expects earnings next year of $ 5 . 6 3 per share, and it plans to pay a $ 3 . 4 0
Skoonz, Inc. expects earnings next year of
$5.63
per share, and it plans to pay a $3.40
dividend to shareholders (assume that is one year from now). Skoonz will retain $2.23
per share of its earnings to reinvest in new projects that have an expected return of 14.5%
per year. Suppose Skoonz 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. Assume next dividend is due in one year. a. What growth rate of earnings would you forecast for Skoonz?
b. If Skoonz's equity cost of capital is
11.2%,
what price would you estimate for Skoonz stock? c. Suppose instead that Skoonz paid a dividend of
$4.40
per share at the end of this year and retained only $1.23
per share in earnings. That is, it chose to pay a higher dividend instead of reinvesting in as many new projects. If Skoonz maintains this higher payout rate in the future, what stock price would you estimate for the firm now? Should Skoonz raise its dividend? Step by Step Solution
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