DFB, Inc. expects earnings next year of $5.35 per share,and it plans to pay a $3.36 dividend to shareholders (assumethat is one year from now). DFB will retain $1.99 per shareof its earnings to reinvest in new projects that have an expectedreturn of 15.4% per year. Suppose DFB will maintain the samedividend payout rate, retention rate, and return on newinvestments in the future and will not change its number ofoutstanding 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 11.6%, what price wouldyou estimate for DFB stock?
c. Suppose instead that DFB paid a dividend of $4.36 pershare at the end of this year and retained only $0.99 pershare in earnings. That is, it chose to pay a higher dividendinstead of reinvesting in as many new projects. If DFB maintainsthis higher payout rate in the future, what stock price would youestimate for the firm now? Should DFB raise its dividend?
DFB, Inc. expects earnings next year of $5.35 per share, and it plans to pay a $3.36 dividend to shareholders (assume
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