Consider company ABC. Today it is the 1st of January 2022. The expected earnings of ABC (in million £) for the next few years (as per the 1st of January) are forecast to be: Year 2023 2024 2025 2026 2027 Expected Earnings 1 1.5 0.9 1.2 1.3 From year 2027 and onwards the earnings of ABC are expected to grow with a growth rate of 5%. The required rate of return of ABC is 12%. The dividend policy of ABC is currently such that they pay out 80% of their earnings as dividends, i.e. their earnings retention ratio b is constant and equals 0.2. The forecast of the growth rate is based on an earnings retention ratio of 0.2. Suppose that you forecast Return on new Investment (RI) to be 10%. What is the optimal dividend policy? Explain.

Consider company ABC. Today it is the 1st of January 2022. The expected earnings of ABC (in million £) for the next few years (as per the 1st of January) are forecast to be: Year 2023 2024 2025 2026 2027 Expected Earnings 1 1.5 0.9 1.2 1.3 From year 2027 and onwards the earnings of ABC are expected to grow with a growth rate of 5%. The required rate of return of ABC is 12%. The dividend policy of ABC is currently such that they pay out 80% of their earnings as dividends, i.e. their earnings retention ratio b is constant and equals 0.2. The forecast of the growth rate is based on an earnings retention ratio of 0.2. Suppose that you forecast Return on new Investment (RI) to be 10%. What is the optimal dividend policy? Explain.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter7: Valuation Of Stocks And Corporations

Section7.6: Valuing Nonconstant Growth Stocks

Problem 3ST

See similar textbooks

Similar questions

Consider company ABC. Today it is 1st of January 2023 and ABC has just paid a dividend of £3 million. The expected earnings of ABC for the next 30 years are forecast to grow at a rate of 15% per annum. From 1st of January 2053 and onwards the earnings of ABC are expected to grow at a rate of 5%. The required rate of return of ABC is 12% per annum. The current dividend policy of ABC is such that they pay out 50% of its earnings as dividends (assume that they pay their dividends on 1st of January every year). a) Suppose that the dividend payout ratio is expected to stay constant in the future. What is the value of ABC stock? Show and explain your calculations and any assumptions you make. b) Just after the dividend payment on 1st of January 2043, ABC is planning to reduce their dividends and only pay out 40% of its earnings. What is the value of ABC under the new dividend policy? c) Provide a recommendation to the management of ABC as to whether they should increase/cut back on…
Consider company ABC. Today it is 1st of January 2023 and ABC has just paid a dividend of £3million. The expected earnings of ABC for the next 30 years are forecast to grow at a rate of 15%per annum. From 1st of January 2053 and onwards the earnings of ABC are expected to grow at arate of 5%. The required rate of return of ABC is 12% per annum. The current dividend policy of ABC is such that they pay out 50% of its earnings as dividends(assume that they pay their dividends on 1st of January every year). a) Suppose that the dividend payout ratio is expected to stay constant in the future. What is the value of ABC stock? Show and explain your calculations and any assumptions you make.b) Just after the dividend payment on 1st of January 2043, ABC is planning to reduce their dividends and only pay out 40% of its earnings. What is the value of ABC under the new dividend policy?c) Provide a recommendation to the management of ABC as to whether they should increase/cut back on dividends in…
Consider company ABC. Today it is 1st of January 2023 and ABC has just paid a dividend of £3 million. The expected earnings of ABC for the next 30 years are forecast to grow at a rate of 15% per annum. From 1st of January 2053 and onwards the earnings of ABC are expected to grow at a rate of 5%. The required rate of return of ABC is 12% per annum. The current dividend policy of ABC is such that they pay out 50% of its earnings as dividends (assume that they pay their dividends on 1st of January every year). Suppose that the dividend payout ratio is expected to stay constant in the future. What is the value of ABC stock? Show and explain your calculations and any assumptions you make. 2) Just after the dividend payment on 1st of January 2043, ABC is planning to reduce their dividends and only pay out 40% of its earnings. What is the value of ABC under the new dividend policy?
Show Detailed Steps When Solving The Following Question: Gordon Growth Company is expected to pay a dividend of $4 next period, and dividends are expected to grow at 6% per year. The required return is 16%. What is the current price? What is the price expected to be in year 4?
A company's next dividend is USD6.5 which is expected to remain stable in the coming years, till perpetuity. Your required rate of return is 16%. a. How much will you offer to buy this stock at? b. If the dividends will grow at a rate of 4% per year, what will be the dividend that the company will distribute in year 16? C. If the dividends will grow at a rate of 2%, what will be the price of the stock in year 9?
Consider a firm that distributes the entire annual earnings to its shareholders through dividends once a year. The firm’s dividends are expected to grow at a rate of 8% per year for the next 5 years until the end of 2035. From 2036 on, the firm’s growth rate is expected to be 4% per year forever. Assume that investors command 12% return on the investments comparable to the firm’s stock. In addition, the firm has just paid an annual dividend of $10 per share at the end of 2030. Required: If you were considering buying the firm’s shares on the first day of 2031, at what price would you buy the shares?
Whizcom Inc. is expected to pay a dividend of $1 next period. Dividends are expected to grow at 2% per year and the investors require a return of 12%. a) What would be the likely stock price in year 5? b) What would be per annum rate of return implied by a change in prices from time 0 to time 5?
Suppose in 2023 the expected dividends of Fordson, Inc. stock will equal $260M with a discount rate of 8% and an expected growth rate for the dividends of 6%. Assuming constant growth rate, if interest increases to 9%, will the val of the company increase or decrease and by how much?
Gordon Growth Company is expected to pay a dividend of $4 next period and dividends are expected to grow at 6% per year. The required return is 16%. What is the price expected to be in year 4? Answer a. $41.6 b. $50.50 c. $40 d. $10
Assume that the economy can experience high growth, normal growth, or recession. Under these conditions, you expect the following stock market returns for the coming year: State of the Economy High Growth Normal Growth Recession Probability 0.2 0.7 0.1 Return 60% 18% 2% a. Compute the expected value of a $1,000 investment over the coming year. If you invest $1,000 today, how much money do you expect to have next year? What is the percentage expected rate of return? Instructions: Enter dollar values rounded to the nearest whole dollar and percentages rounded to one decimal place. The expected value is $ and the expected rate of return is b. Compute the standard deviation of the percentage return over the coming year. Standard deviation = % = %. c. If the risk-free return is 7 percent, what is the risk premium for a stock market investment? Risk premium %
Whizcom Inc. is expected to pay a dividend of $1 next period. Dividends are expected to grow at 2% per year and the investors require a return of 12%. i) Compute the current stock price for Whizcom Inc.ii) What would be the likely stock price in year 5?iii) What would be per annum rate of return implied by a change in prices from time 0 to time 5?
If XYZ Company has 2023 earnings per share of $3 and its growth rate is 9%, how long will it take XYZ to double its earnings per share?