Question

Suppose a firm has a retention ratio of 15 percent, net income of $60 million, and 15 million shares outstanding. What would be the dividend per share paid out on the firm's stock?

Candy Town, Inc. normally pays a annual dividend. The last such dividend paid was $2.00, all future annual dividends are expected to grow at 10 percent, and the firm faces a required rate of return on equity of 15 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $5.00 per share that is not expected to affect any other future dividends, what should the stock price be?

Answer 1

1)

pay out ratio = 1 - retention ratio

= 1 - 15%

= 85%

net income = $60 million

Pay out = 60*85% = $51 million

number of shares outstanding = 15 million

dividend per share = 51 / 15 = $3.4

2)

stock price = D*(1+growth) / K - g

where K = required return

g = growth rate

next year dividend = 2*1.10 = 2.20

srockprice = 2.20 / 15% - 10%

= 44

how ever dividend for next year = $5

extra dividend = 5 - 2.20 = $2.80

so current stock price = 44 + [2.80 / (1+15%)]

= $46.43