Question

ALTERNATIVE DIVIDEND POLICIES Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $1.4 out of annual earnings per share of $4.75. Currently, Rubenstein Bros.' stock is selling for $32.00 per share. Adhering to the company's target capital structure, the firm has $10 million in total invested capital, of which 60% is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of 22%, which is expected to continue this year and into the foreseeable future. Based on this information, what long-run growth rate can the firm be expected to maintain? Round your answer to two decimal places. Do not round intermediate calculations. (Hint: g = Retention rate x ROE.) % What is the stock's required return? Round your answer to two decimal places. Do not round intermediate calculations. % If the firm changed its dividend policy and paid an annual dividend of $2.80 per share, financial analysts would predict that the change in policy will have no effect on the firm's stock price or ROE. Therefore, what must the firm's new expected long-run growth rate? Round your answer to two decimal places. Do not round intermediate calculations. % If this plan is implemented, what must the firm's required return be? Round your answer to two decimal places. Do not round intermediate calculations. % Suppose instead that the firm has decided to proceed with its original plan of disbursing $1.4 per share to shareholders, but the firm intends to do so in the form of a stock dividend rather than a cash dividend. The firm will allot new shares based on the current stock price of $32.00. In other words, for every $32.00 in dividends due to shareholders, a share of stock will be issued. How large will the stock dividend be relative to the firm's current market capitalization? (Hint: Remember market capitalization = P0 x number of shares outstanding.) Round your answer to two decimal places. Do not round intermediate calculations. % If the plan in part d is implemented, how many new shares of stock will be issued? Round your answer to the nearest whole dollar. Do not round intermediate calculations. f .If the plan in part d is implemented, by how much will the company's earnings per share be diluted? Round your answer to the nearest cent. Do not round intermediate calculations. $  per share

Answer 1

Given,

Dividend per share (D₁) = $ 1.4

Earnings per share = $ 4.75

Stock price (P₀) = $ 32

Total invested capital = $ 10 million or $ 10000000

Return on equity = 22%

Solution :-

Retention amourd per Share Earnings per share Dividend Per Share $ 1.4 $3.3S $4.75 Retention ato- Retention a moud ferShare Earnings per share $3.35 Fu.75 0.705263 Long-run growth rate l) -Retention ratio x Retuxn on equty 15. SR O.T0SR63 x R2 (b) Carowth rate 1S.S2 Or 0.ISSR Novs stock 's requixed xcturn DI +9

$1.4 $33 + 0.1552 0.04375 t0.1552 Or 19.90 O. 1990 fietendi Dividend Per Share (D,)2.80 Retentien amount Per Share Eainings per share Dividerd Per share 4.75 1.95 २.१० Retention ratio Reterhonamourd Per Share Earnings per Share 1.95 4.75 O.4105263 1 New expected grouth ate l2) Retention ratio x Return on equity O. 4105263 X 22 9.03 1. arowth xate la)-9.03/. or 0.0903

Firm's required return DI 6ि $2.80 E32 +0.0903 0.0875 t0. 0903 0. 1228 0 602 (Debt) Equity rato loor Equity apital Total Inuestedl Capital x Equity racho $10000000 x Yox 4000000 Net Imlome Equity lapital x Retuan on eguity $880000 44000000 X

Net Intome No. 0f Shares Earnings per share $ 880000 No. of shares $4.75 No. of shares $880000 F4.75 185363 Shares No of Shares Now Total Dividend No. ot shares x Dividend Per share 185363 shares x 1.4 २5१368.२०

market Capitali zation x No. of Shares $ 3.2 X 185263 Shares $ 592 8416 Rate ot dividerd to maxket Total Dividtnd market apitalization Ca pitalization 259 368.20 E5928416 0.O438 o 4.38 % Thus, it the Stock cuvidencl is it shall account implementeol ot the famls current for 4.38 market Capitali zation. SAV