Question
The Harvey Corporation currently reinvests 40% of its earnings and earns a return of 20 percent on these investments. The dividend yield on the stock
The Harvey Corporation currently reinvests 40% of its earnings and earns a return of 20 percent on these investments. The dividend yield on the stock is 4 percent. a. Assuming Harvey Corp can continue to plow back this portion of its earnings and earn a 20 percent return on the investment, how rapidly will earnings and dividends grow? What is the expected return on Harvey Corps stock? b. Suppose the company suddenly announces that future investment opportunities have dried up. Now Harvey Corp will pay out all of its earnings. How will the stock price change? c. Now suppose that the company simply announces that the expected return on new investment will be the same as the market capitalization rate. Now what is Harvey Corps stock price?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started