Surf & Turf Hotels is a mature business, although it pays no cash dividends. Next years earnings are forecasted at $96 million. There are 10 million outstanding shares. The company has traditionally paid out 50% of earnings by repurchases and reinvested the remaining earnings. With reinvestment, the company has generated steady growth averaging 5% per year. Assume the cost of equity is 18%.

a. incorrect b. correct

Problem 15-16 Repurchases and the DCF model Surf \& Turf Hotels is a mature business, although it pays no cash dividends. Next year's earnings are forecasted at $96 million. There are 10 million outstanding shares. The company has traditionally paid out 50% of earnings by repurchases and reinvested the remaining earnings. With reinvestment, the company has generated steady growth averaging 5% per year. Assume the cost of equity is 18%. a. Calculate Surf \& Turf 's current stock price, using the constant-growth DCF model. (Hint Take the easy route and estimate overall market capitalization.) b. Now Surf \& Turf's CFO announces a switch from repurchases to a regular cash dividend. Next year's dividend will be $4.80 per share. The CFO reassures investors that the company will continue to pay out 50% of earnings and reinvest 50%. All future payouts will come as dividends, however. What would be Surf \& Turf's stock price? Note: For all requirement, do not round intermediate calculations. Round your answers to 2 decimal places