The company will pay a $1 dividend per share one year from now. There currently
ID: 2784794 • Letter: T
Question
The company will pay a $1 dividend per share one year from now. There currently are 100 shares outstanding. The company’s earnings are expected to grow at 9% indefinitely. The dividend payout ratio is 30%, and the firm uses 10% of earnings to repurchase shares each year. Consider the total payout model and assume that the cost of capital is 10%
a) What is the retention rate?
b) What must be the return on new investment?
c) What is the total projected earnings and EPS one year from now?
d) What is the Total Payout amount one year from now?
e) What is the total value of the firm’s equity and the price per share today?
f) What is the dividend yield?
) What is the growth rate of dividends?
Explanation / Answer
a)Retention rate =1-Payout rate=1-.3=70%
Earnings per share=1/.3=3.33
Total earnings=100×3.33=333
Remaining shares =100-10=90
Return on equity=3.33/90=3.7%
EPS next year=3.33×1.09=3.629
Price=1×1.09/(.1-.09)=$109
Dividend yield=1/109=.91%
Growth =ROE×Retention rate
Growth rate=.037×.7=2.60%
Thank you.