The Adams Corporation has earnings of $$1,250,000$ with $450,000$ shares outstanding. Its P$/$E ratio is $11$ The firm is holding $$550,000$ of funds to invest or pay out in dividends. If the funds are retained, the afterta: return on investment will be $13$ percent, and this will add to present earnings. The $13$ percent is the normal return anticipated for the corporation, and the P$/$E would remain unchanged. If the funds are paid out in the form of dividends, the P$/$E ratio will increase by $12$ percent, because the shareholders in this corporatio have a preference for dividends over retained earnings. Which plan will maximize the value of the stock?

B

C

C

D

E

$$1,250,000$

Earnings

Shares outstanding

Cash

Normal anticipated P$/$E return on Retained Earn P$/$E Ratio

Potential increase in P$/$E if paid in Dividends

$450,000$

$$550,000$

$13\%$

$11$

$12\%$

Retain the earnings

Incremental earnings

Earnings per share

Price of stock

Payout the earnings

New P$/$E

Earnings per share

Price of stock

$$

The payout option provides the maximum market value for the

Conclusion: shares.