Question

Crane Sporting Goods expect to have earnings per share of $6 in the coming year. Rather...

Crane Sporting Goods expect to have earnings per share of $6 in the coming year. Rather than reinvest these earnings and grow, the firm plans to pay out all of its earnings as a dividend. With the expectation of zero growth in dividend, the firm's current share price is $60. Suppose the firm plans to cut its dividend payout rate to 75% for the forseeable future and use the retained earnings to open new stores. The return on equity for these new stores is expected to be 12%. How would this change in dividend policy affect stock prices according to discount dividend model?

Stock price will increase

Stock price will decrease

Stock price will stay the same

Not sure about the direction of change

Homework Answers

Answer #1

EPS - $6

Current Share Price - $60

Dividend payout Ratio = 75%

ROE - 12%

Retention Ratio = 1 - DPR = 1 - 75% = 25%

Growth rate = retention ratio x return on equity = 25% x 12% = 3%

Calculation of stock price before change in Dividend policy according to dividend discount model

Stock price = Dividend/ke = $6/.12 = $50

Calculation of stock price After change in Dividend policy according to dividend discount model

New Dividend = 6 x 75% = $4.5

Stock price = Dividend(1+growth rate)/ke - growth rate = $4.5(1.03)/12%-3% = 4.635/ 9 = $51.5

Stock price Earlier is $ 50

and now is $ 51.5, hence increase in Stock price by $1.5

Note : cost of equity is not given in question therefore assuming it as equal to return on equity i.e, 12%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
6. You expect that MotorRotor ltd. will have earnings per share of $2 for the coming...
6. You expect that MotorRotor ltd. will have earnings per share of $2 for the coming year. MotorRotor plans to retain all of its earnings for the next three years. For the subsequent two years, the firm plans on retaining 50% of its earnings. It will then retain only 25% of its earnings from that point forward. Retained earnings will be invested in projects with an expected return of 20% per year. If MotorRotor’s equity cost of capital is 12%,...
You expect that Bean Enterprises will have earnings per share of​ $2 for the coming year....
You expect that Bean Enterprises will have earnings per share of​ $2 for the coming year. Bean plans to retain all of its earnings for the next three years. For the subsequent two​ years, the firm plans on retaining​ 50% of its earnings. It will then retain only​ 25% of its earnings from that point forward. Retained earnings will be invested in projects with an expected return of​ 20% per year. If​ Bean's equity cost of capital is 14​%, then...
You expect that IBM will have earnings per share of $2.50 for the coming year. IBM...
You expect that IBM will have earnings per share of $2.50 for the coming year. IBM plans to retain all of its earnings for years 1-3. For the subsequent two years (years 4 and 5), the firm plans on retaining 40% of its earnings. It will then retain only 10% of its earnings from that point forward. Retained earnings will be invested in projects with an expected return of 15% per year. If IBM's equity cost of capital is 12%,...
A. Growth and Value A firm has projected earnings of $6 per share for next year...
A. Growth and Value A firm has projected earnings of $6 per share for next year and has a 30% dividend payout ratio. The firm's required return is 13%. The firm's ROE is 14%. What is the intrinsic value of the stock? $56.25 $54.33 $50.77 $49.65 B. Value of Growth Opportunities A firm has projected annual earnings per share of $4.00 and a dividend payout ratio of 60%. The firm's required return is 11% and dividends and earnings are expected...
You expect that Bean Enterprises will have earnings per share of $2 for the coming year....
You expect that Bean Enterprises will have earnings per share of $2 for the coming year. Bean plans to retain all of its earnings for the next three years. For the subsequent two years, the firm plans on retaining 50% of its earnings. It will then retain only 25% of its earnings from that point forward. Retained earnings will be invested in projects with an expected return of 20% per year. If Bean?s equity cost of capital is 10%, then...
DFB, Inc., expects earnings this year of $5.48 per​ share, and it plans to pay a...
DFB, Inc., expects earnings this year of $5.48 per​ share, and it plans to pay a $3.96 dividend to shareholders. DFB will retain $1.52 per share of its earnings to reinvest in new projects with an expected return of 14.8% per year. Suppose DFB 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​...
Halliford Corporation expects to have earnings this coming year of $2.673 per share. Halliford plans to...
Halliford Corporation expects to have earnings this coming year of $2.673 per share. Halliford plans to retain all of its earnings for the next two years.​ Then, for the subsequent two​ years, the firm will retain 48% of its earnings. It will retain 18% of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 21.4% per year. Any earnings that are not retained will be paid out as...
Halliford Corporation expects to have earnings this coming year of $2.765 per share. Halliford plans to...
Halliford Corporation expects to have earnings this coming year of $2.765 per share. Halliford plans to retain all of its earnings for the next two years.​ Then, for the subsequent two​ years, the firm will retain 51%of its earnings. It will retain 21% of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 20.3% per year. Any earnings that are not retained will be paid out as dividends....
Halliford Corporation expects to have earnings this coming year of $2.833 per share. Halliford plans to...
Halliford Corporation expects to have earnings this coming year of $2.833 per share. Halliford plans to retain all of its earnings for the next two years.​ Then, for the subsequent two​ years, the firm will retain 51% of its earnings. It will retain 21% of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 20.1% per year. Any earnings that are not retained will be paid out as...
Halliford Corporation expects to have earnings this coming year of $3.067 per share. Halliford plans to...
Halliford Corporation expects to have earnings this coming year of $3.067 per share. Halliford plans to retain all of its earnings for the next two years.​ Then, for the subsequent two​ years, the firm will retain 49% of its earnings. It will retain 17% of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 27.5% per year. Any earnings that are not retained will be paid out as...