DFB, Inc. expects earnings next year of $5.53 per share, and itplans to pay a $3.05 dividend to shareholders (assume that is1-year from now). DFB will retain $2.48 per share of its earningsto reinvest in new projects that have an expected return of 15.1%per year.
Suppose DFB will maintain the same dividend payout rate,retention rate, and return on new investments in the future andwill not change its number of outstanding shares. Assume nextdividend is due in one year.
a. What growth rate of earnings would you forecast for DFB?
2.3%
3.4%
4.5%
5.6%
None of the above
b. If DFB's equity cost of capital is 11.1% and growth rate is6.8%, what price would you estimate for DFB stock?
$47.60
$58.71
$69.82
$70.93
None of the above
c. Suppose instead that DFB paid a dividend of $4.05 per shareat the end of this year and retained only $1.48 per share inearnings. That is, it chose to pay a higher dividend instead ofreinvesting in as many new projects. If DFB maintains this higherpayout rate in the future, what stock price would you estimate forthe firm now? Should DFB raise its dividend?
$57.04, DFB should raise dividends because it will result in ahigher stock price.
$57.04, DFB should not raise dividends because it will result ina lower stock price.
$60.25, DFB should not raise dividends because it will notresult in a higher stock price.
$68.15, DFB should raise dividends because it will result in ahigher stock price.
$68.15, DFB should not raise dividends because it will notresult in a higher stock price.
