Question

Maynard Steel plans to pay a dividend of $ 2.99 this year. The company has an expected earnings growth rate of 4.3% per year and an equity cost of capital of 10.7%.

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

b. Suppose Maynard decides to pay a dividend of $0.94 this year and use the remaining $2.05 per share to repurchase shares. If​ Maynard's total payout rate remains​ constant, estimate​ Maynard's share price.

c. If Maynard maintains the same split between divdends and​ repurchases, and the same payout​ rate, as in part ​(b​), at what rate are​ Maynard's dividends, earnings per​ share, and share price expected to grow in the​ future?

Note​:

The share price is expected to also grow at the same rate as dividends and earnings per share.

Answer 1

a.

Share price = Expected dividend/ (Cost of equity – growth rate)               

                     = $ 2.99/ (10.7 % - 4.03 %) = $ 2.99/ (0.107 – 0.0403)

                     = $ 2.99/ 0.0667 = $ 44.827586 or $ 44.83

Price of share is $ 44.83

b.

Current share price is same.

c.

Share price = Expected dividend/ (Cost of equity – growth rate)               

$ 44.827586 = $ 0.94/ (10.7 % - growth rate)

0.107 – growth rate = $ 0.94/$ 44.827586

0.107 – growth rate = 0.020969231

Growth rate = 0.107 – 0.020969231 = 0.086030769

Growth rate = 8.6 %

answered by: anonymous