Question

XYZ Corporation has total earnings of $500 Million which are projected to remain constant. XYZ also has total shares outstanding of 300 million. The corporation intends to distribute dividends to its shareholders according to the following schedule: Period 1: Give a dividend payout rate of 40% Period 2: Give a dividend payout rate of 100%. Period 3 until forever: Give a dividend payout rate of 70%. Dividends are also projected to grow at a rate of 4% every year forever. (a) 5 Points. Find the price of XYZ corporation’s stock in period 2 (call it P2). Given P2 write down the formula that would determine the (per share) price of XYZ’s stock today (P0). Assume equity cost of capital is 8%. (b) What is the expected total return from this stock? Assume, you will sell the stock at the end of period 2. (c) Suppose that in Period 3, XYZ also intends to start buying back some of its shares outstanding and it intends to spend 20% of its earnings (in addition to the 70% paid as dividends)to do so. According to the total payout model, what would be the stock price of XYZ Corporation in period 2?

Answer 1