Question

Maynard Steel plans to pay a dividend of $ 3.17 this year. The company has an expected earnings growth rate of 4.1 % per year and an equity cost of capital of 9.3 %.

a. Assuming​ 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 $ 1.04 this year and use the remaining $ 2.13 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.   

Given dividend growth = 4.1%.

equity cost of capital = 9.3%

dividend paid = $3.17.

Share price = dividend paid / (cost of capital-growth rate)= 3.17 / (9.3% – 4.1%) = $60.96

b.

As it is given that total payout rate remains​ constant, and total amount = $1.04 + $2.13 = $3.17

Using the total payout model,

Share price = (dividend paid + repurchases)/ (cost of capital-growth rate)=

Share price = $1.04 + $2.13 / (9.3% – 4.1%) = 3.17 / (9.3% – 4.1%) = $60.96

c.

growth rate = cost of capital – Dividend Yield = 9.3% – 1.04/60.96 = 7.59%

Note: Answers are rounded off to two decimals