Question

Maynard Steel plans to pay a dividend of $3.16 this year. The company has an expected earnings growth rate of 3.6% per year and an equity cost of capital of 10.4%.

a. Assuming that Maynard's dividend payout rate and expected growth rate remain constant, and that the firm does not issue or repurchase shares, estimate Maynard's share price.

b. Suppose Maynard decides to pay a dividend of $1.07 this year and use the remaining $2.09 per share to repurchase shares. If Maynard's total payout rate remains constant, estimate Maynard's share price.

c. If Maynard maintains the dividend and total payout rate in (b), at what rate are Maynard's dividends and earnings per share expected to grow?

Answer #1

**a. The price is computed as follows:**

**= Expected dividend / (cost of capital - growth
rate)**

= $ 3.16 / (0.104 - 0.036)

= $ 3.16 / 0.068

**= $ 46.47**

**b. The price is computed as follows:**

**= Expected dividend / (cost of capital - growth
rate)**

= $ 3.16 / (0.104 - 0.036)

= $ 3.16 / 0.068

**= $ 46.47**

**c. The growth rate is computed as follows:**

**= cost of capital - Dividend / Price**

= 10.4% - $ 1.07 / $ 46.47

**= 8.10%**

**Feel free to ask in case of any query relating to this
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