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Crescent Corporation has earnings of $895,500 with 330,000 shares outstanding. The company is currently trading at a P/E ratio of 14x. Management is deciding whether the company should keep $450,000 of funds and invest it or pay it out in the form of dividends.

If the funds are retained, the estimated after-tax return on investment is 10%, and this will add to present earnings. The 10% is the normal return anticipated for the corporation, and the P/E ratio would remain unchanged.

If the company pays out the funds in the form of dividends, management expects the P/E ratio will increase by 10%, since their shareholders have a preference for dividends over retained earnings.

Answer the following questions, and please show ALL work.

1. (1 mark) What is the incremental retained earnings if the funds are retained and invested?
2. (1 mark) Calculate the companys EPS if the company retained and invested the funds.
3. (1 mark) What would the companys share price be if the funds were retained and invested?
4. (1 mark) What would the companys P/E multiple be if the funds were paid out as dividends?
5. (1 mark) Calculated the companys EPS if the company paid out the funds as dividends.
6. (1 mark) What would the companys share price be if the funds were paid out as dividends?
7. (2 marks) What would the companys dividend yield be?
8. (1 mark) Should management retain and invest the funds or pay the funds out as dividends?
9. (1 mark) Would your answer to part h) change if the companys P/E multiple stayed the same? Explain.

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