Question

DFB, Inc. expects earnings next year of $ 4.71 per​ share, and it plans to pay a $ 2.74 dividend to shareholders​ (assume that is one year from​ now). DFB will retain $ 1.97 per share of its earnings to reinvest in new projects that have an expected return of 14.1 % per year. Suppose DFB will maintain the same dividend payout​ rate, retention​ rate, and return on new investments in the future and will not change its number of outstanding shares. Assume next dividend is due in one year. a. What growth rate of earnings would you forecast for​ DFB? b. If​ DFB's equity cost of capital is 12.3 % ​, what price would you estimate for DFB​ stock? c. Suppose instead that DFB paid a dividend of $ 3.74 per share at the end of this year and retained only $ 0.97 per share in earnings. That​ is, it chose to pay a higher dividend instead of reinvesting in as many new projects. If DFB maintains this higher payout rate in the​ future, what stock price would you estimate for the firm​ now? Should DFB raise its​ dividend?

a. What growth rate of earnings would you forecast for​ DFB?

​DFB's growth rate of earnings is __________% (Round to one decimal​ place.)

b. If​ DFB's equity cost of capital is 12.3 % what price would you estimate for DFB​ stock?

If​ DFB's equity cost of capital is 12.3 % then​ DFB's stock price will be ___________$(Round to the nearest​ cent.)

c. Suppose instead that DFB paid a dividend of $ 3.74 per share at the end of this year and retained only $ 0.97 per share in earnings. That​ is, it chose to pay a higher dividend instead of reinvesting in as many new projects. If DFB maintains this higher payout rate in the​ future, what stock price would you estimate for the firm​ now? If DFB__________$ (Round to the nearest​ cent.)

Should DFB raise its​ dividend?  ​(Select the best choice​ below.)

A. No, DFB should not raise dividends because the projects are positive NPV.

B. Yes, DFB should raise dividends​ because, according to the​ dividend-discount model, doing so will always improve the share price.

C. Yes, DFB should raise dividends because the return on new investments is lower than the cost of capital.

D. No, DFB should not raise dividends because companies should always reinvest as much as possible.

Answer 1

I HAVE GIVEN SOLUTION WITHOUT INTERMEDIATE ROUNDING AND WITH SINGLE DECIMAL ROUNDING, BECAUSE NOTHING IS MENTIONED REGARDING ROUNDING WHILE CALCULATING PRICE.

THIS SUM IS FROM DEBERK MARZO BOOK, AND HAVE DONE EARLIER ALSO. THANK YOU.