Answer Happy

DFB, Inc. expects earnings next year of $4.89 per​ share, and it
plans to pay a $2.76 dividend to shareholders​ (assume that
is one year from​ now). DFB will retain $2.13 per share of its
earnings to reinvest in new projects that have an expected return
of $15.2% 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 11.8%​, what price would you
estimate for DFB​ stock?
c. Suppose instead that DFB paid a dividend of $3.76 per share at
the end of this year and retained only $1.13 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?