Maynard Steel plans to pay a dividend of $2.85 this year. The company has an exp
ID: 2571664 • Letter: M
Question
Maynard Steel plans to pay a dividend of $2.85 this year. The company has an expected earnings growth rate of 3.7% per year and an equity cost of capital of 10.2%.
a. Assuming Maynard's dividend payout rate and expected growth rate remain constant, and Maynard does not issue or repurchase shares, estimate Maynard's share price.
b. Suppose Maynard decides to pay a dividend of $0.92 this year and use the remaining $1.93 per share to repurchase shares. If Maynard's total payout rate remainsconstant, estimate Maynard's share price.
c. If Maynard maintains the same split between divdends and repurchases, and the same payout rate, as in part (b), at what rate are Maynard's dividends, earnings pershare, and share price expected to grow in the future?
Note:
The share price is expected to also grow at the same rate as dividends and earnings per share.
Explanation / Answer
SOLUTION
(A) Earnings growth = EPS growth = Dividend growth = 3.7%
Share price = Dividend / (cost of capital - growth rate)
= $2.85 / (10.2% - 3.7%)
= $2.85 / 6.5% = $43.8
(B) Using the total payout =
Share price = Dividend / (cost of capital - growth rate)
= $2.85 / (10.2% - 3.7%)
= $2.85 / 6.5% = $43.8
(C) Growth rate = cost of capital - Dividend yield
= 10.2% - (1/43.80) = 7.91%