Question

Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $0.6 out of annual earnings per share of $3.5. Currently, Rubenstein Bros.' stock is selling for $30.50 per share. Adhering to the company's target capital structure, the firm has $9 million in total invested capital, of which 50% is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of 17%, which is expected to continue this year and into the foreseeable future.

A. Based on this information, what long-run growth rate can the firm be expected to maintain? Round your answer to two decimal places. Do not round intermediate calculations. (Hint: g = Retention rate x ROE.)
%

B. What is the stock's required return? Round your answer to two decimal places. Do not round intermediate calculations.
%

C. If the firm changed its dividend policy and paid an annual dividend of $1.20 per share, financial analysts would predict that the change in policy will have no effect on the firm's stock price or ROE. Therefore, what must the firm's new expected long-run growth rate? Round your answer to two decimal places. Do not round intermediate calculations.
%

If this plan is implemented, what must the firm's required return be? Round your answer to two decimal places. Do not round intermediate calculations.
%

D. Suppose instead that the firm has decided to proceed with its original plan of disbursing $0.6 per share to shareholders, but the firm intends to do so in the form of a stock dividend rather than a cash dividend. The firm will allot new shares based on the current stock price of $30.50. In other words, for every $30.50 in dividends due to shareholders, a share of stock will be issued. How large will the stock dividend be relative to the firm's current market capitalization? (Hint: Remember market capitalization = P₀ x number of shares outstanding.) Round your answer to two decimal places. Do not round intermediate calculations.
%

E. If the plan in part d is implemented, how many new shares of stock will be issued? Round your answer to the nearest whole dollar. Do not round intermediate calculations.


If the plan in part d is implemented, by how much will the company's earnings per share be diluted? Round your answer to the nearest cent. Do not round intermediate calculations.
$  per share

Answer 1

Given
Expected Div	0.6
Earning per share	3.5
Capital	9,000,000
Debt	4,500,000
Equity	4,500,000
ROE	17%
ROE =	Net Income/Shareholder's Equity
Stock price	30.5
A)
Dividend payout ratio	Div per share/ EPS
Dividend payout ratio	17.14%		=+B3/B4
Retention Ratio=	1-Payout ratio
Retention Ratio=	82.86%		=1-B15
Growth Rate =	Retention Ratio X ROE
Growth Rate =	14.09%		=+B18*B8
B) Required rate of return
Ke= Div per share/ Mrkt price +growth
Ke=	16.05%		=(0.6/30.5)+B21
C) If the dividend pay out is changed to $1.2 per share, revised ratios would be
Dividend payout ratio	34.29%		=1.2/3.5	dps/eps
Retention ration	65.71%		=1-B32
Revised Growth rate	11.17%		=+B33*B8
D & E) Stock issue instead of cash dividend
No. of share outstanding	147541		=4500000/30.5
As book value of the share is equal to the market value
Dividend in $	88524.59		=+B40*0.6
Stock Price	30.50
New Shares issued	2902.45		=+B43/B44
relativity	1.97%		=+B45/B40