Consider company ABC whose stock dividend per share next year is expected to be
ID: 2665988 • Letter: C
Question
Consider company ABC whose stock dividend per share next year is expected to be $30 and has expected dividend growth rate of 2% per year. The expected required return rate is 10% per year.a. What is the price s. Share of ABC?
b. If expected dividend growth rises to 3%, what would happen to the share price? Why?
c. Now go back to the assumption of 2% dividend growth. ABC has the expected dividend growth of 2% because its return on equity is 8% and management retains 25% of earnings. What are the earnings per share of ABC next period? What is the present value of growth opportunities?
d. Suppose ABC announces that it will immediately increase its retention rate to 50%. What will be the new value of the stock after the change in policy?
e. Suppose the current management is fired, and you are hired as chief financial officer. If you objective were to increase the share price and shareholder value as much as possible, what new retention rate "b" would you recommend to the CEO? What would be the new stock price under your policy?
Explanation / Answer
a) Po = D / (r-g) Po = 30 / (.1-.02) = $375 b) As you can see from the equation above, increasing the growth rate will also increase the price of the stock. Since it is an inverse part of the equation. Unfortunately, my knowledge does not go C) through E).