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 #2

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

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