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%

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