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Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $0.6 out of...

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Finance

Rubenstein Bros. Clothing is expecting to pay an annual dividendper share of $0.6 out of annual earnings per share of $3.5.Currently, Rubenstein Bros.' stock is selling for $30.50 per share.Adhering to the company's target capital structure, the firm has $9million in total invested capital, of which 50% is funded by debt.Assume that the firm's book value of equity equals its marketvalue. In past years, the firm has earned a return on equity (ROE)of 17%, which is expected to continue this year and into theforeseeable future.

A. Based on this information, what long-run growth rate can thefirm be expected to maintain? Round your answer to two decimalplaces. Do not round intermediate calculations. (Hint: g =Retention rate x ROE.)
%

B. What is the stock's required return? Round your answer to twodecimal places. Do not round intermediate calculations.
%

C. If the firm changed its dividend policy and paid an annualdividend of $1.20 per share, financial analysts would predict thatthe change in policy will have no effect on the firm's stock priceor ROE. Therefore, what must the firm's new expected long-rungrowth rate? Round your answer to two decimal places. Do not roundintermediate calculations.
%

If this plan is implemented, what must the firm's required returnbe? Round your answer to two decimal places. Do not roundintermediate calculations.
%

D. Suppose instead that the firm has decided to proceed with itsoriginal plan of disbursing $0.6 per share to shareholders, but thefirm intends to do so in the form of a stock dividend rather than acash dividend. The firm will allot new shares based on the currentstock price of $30.50. In other words, for every $30.50 individends due to shareholders, a share of stock will be issued. Howlarge will the stock dividend be relative to the firm's currentmarket capitalization? (Hint: Remember market capitalization =P0 x number of shares outstanding.) Round your answer totwo decimal places. Do not round intermediate calculations.
%

E. If the plan in part d is implemented, how many new shares ofstock will be issued? Round your answer to the nearest wholedollar. Do not round intermediate calculations.


If the plan in part d is implemented, by how much will thecompany's earnings per share be diluted? Round your answer to thenearest cent. Do not round intermediate calculations.
$  per share

Answer & Explanation Solved by verified expert
3.6 Ratings (502 Votes)

Given
Expected Div 0.6
Earning per share 3.5
Capital                              9,000,000
Debt                              4,500,000
Equity                              4,500,000
ROE 17%
ROE = Net Income/Shareholder's Equity
Stock price 30.5
A)
Dividend payout ratio Div per share/ EPS
Dividend payout ratio 17.14% =+B3/B4
Retention Ratio= 1-Payout ratio
Retention Ratio= 82.86% =1-B15
Growth Rate = Retention Ratio X ROE
Growth Rate = 14.09% =+B18*B8
B) Required rate of return
Ke= Div per share/ Mrkt price +growth
Ke= 16.05% =(0.6/30.5)+B21
C) If the dividend pay out is changed to $1.2 per share, revised ratios would be
Dividend payout ratio 34.29% =1.2/3.5 dps/eps
Retention ration 65.71% =1-B32
Revised Growth rate 11.17% =+B33*B8
D & E) Stock issue instead of cash dividend
No. of share outstanding 147541 =4500000/30.5
As book value of the share is equal to the market value
Dividend in $ 88524.59 =+B40*0.6
Stock Price 30.50
New Shares issued 2902.45 =+B43/B44
relativity 1.97% =+B45/B40

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Transcribed Image Text

Rubenstein Bros. Clothing is expecting to pay an annual dividendper share of $0.6 out of annual earnings per share of $3.5.Currently, Rubenstein Bros.' stock is selling for $30.50 per share.Adhering to the company's target capital structure, the firm has $9million in total invested capital, of which 50% is funded by debt.Assume that the firm's book value of equity equals its marketvalue. In past years, the firm has earned a return on equity (ROE)of 17%, which is expected to continue this year and into theforeseeable future.A. Based on this information, what long-run growth rate can thefirm be expected to maintain? Round your answer to two decimalplaces. Do not round intermediate calculations. (Hint: g =Retention rate x ROE.)%B. What is the stock's required return? Round your answer to twodecimal places. Do not round intermediate calculations.%C. If the firm changed its dividend policy and paid an annualdividend of $1.20 per share, financial analysts would predict thatthe change in policy will have no effect on the firm's stock priceor ROE. Therefore, what must the firm's new expected long-rungrowth rate? Round your answer to two decimal places. Do not roundintermediate calculations.%If this plan is implemented, what must the firm's required returnbe? Round your answer to two decimal places. Do not roundintermediate calculations.%D. Suppose instead that the firm has decided to proceed with itsoriginal plan of disbursing $0.6 per share to shareholders, but thefirm intends to do so in the form of a stock dividend rather than acash dividend. The firm will allot new shares based on the currentstock price of $30.50. In other words, for every $30.50 individends due to shareholders, a share of stock will be issued. Howlarge will the stock dividend be relative to the firm's currentmarket capitalization? (Hint: Remember market capitalization =P0 x number of shares outstanding.) Round your answer totwo decimal places. Do not round intermediate calculations.%E. If the plan in part d is implemented, how many new shares ofstock will be issued? Round your answer to the nearest wholedollar. Do not round intermediate calculations.If the plan in part d is implemented, by how much will thecompany's earnings per share be diluted? Round your answer to thenearest cent. Do not round intermediate calculations.$  per share

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