(Measuring growth) Solarpower Systems earned $20 per share at the beginning of the year and paid out $9 in dividends t
Posted: Wed Mar 09, 2022 8:43 am
(Measuring growth) Solarpower Systems earned $20 per share at
the beginning of the year and paid out $9 in dividends to
shareholders (so, Upper D 0 equals $ 9) and retained $11 to invest
in new projects with an expected return on equity of 19 percent. In
the future, Solarpower expects to retain the same dividend payout
ratio, expects to earn a return of 19 percent on its equity
invested in new projects, and will not be changing the number of
shares of common stock outstanding.
a. Calculate the future growth rate for Solarpower's
earnings.
b. If the investor's required rate of return for Solarpower's
stock is 14 percent, what would be the price of Solarpower's
common stock?
c. What would happen to the price of Solarpower's common stock
if it raised its dividends to $12 and then continued with that same
dividend payout ratio permanently? Should Solarpower make this
change? (Assume that the investor's required rate of return
remains at 14 percent.)
d. What would happened to the price of Solarpower's common
stock if it lowered its dividends to $4 and then continued with
that same dividend payout ratio permanently? Does the constant
dividend growth rate model work in this case? Why or why not?
(Assume that the investor's required rate of return remains at14
percent and that all future new projects will earn 19 percent.)
the beginning of the year and paid out $9 in dividends to
shareholders (so, Upper D 0 equals $ 9) and retained $11 to invest
in new projects with an expected return on equity of 19 percent. In
the future, Solarpower expects to retain the same dividend payout
ratio, expects to earn a return of 19 percent on its equity
invested in new projects, and will not be changing the number of
shares of common stock outstanding.
a. Calculate the future growth rate for Solarpower's
earnings.
b. If the investor's required rate of return for Solarpower's
stock is 14 percent, what would be the price of Solarpower's
common stock?
c. What would happen to the price of Solarpower's common stock
if it raised its dividends to $12 and then continued with that same
dividend payout ratio permanently? Should Solarpower make this
change? (Assume that the investor's required rate of return
remains at 14 percent.)
d. What would happened to the price of Solarpower's common
stock if it lowered its dividends to $4 and then continued with
that same dividend payout ratio permanently? Does the constant
dividend growth rate model work in this case? Why or why not?
(Assume that the investor's required rate of return remains at14
percent and that all future new projects will earn 19 percent.)