Question

Maynard Steel plans to pay a dividend of $ 2.87 this year. The company has an expected earnings growth rate of 4.2 % per year and an equity cost of capital of 10.8 %.

a. Assuming​ Maynard's dividend payout rate and expected growth rate remain​ constant, and that the firm does not issue or repurchase​ shares, estimate​ Maynard's share price.

b. Suppose Maynard decides to pay a dividend of $ 0.91 this year and use the remaining $ 1.96 per share to repurchase shares. If​ Maynard's total payout rate remains​ constant, estimate​ Maynard's share price.

c. If Maynard maintains the dividend and total payout rate in ​(b​), at what rate are​ Maynard's dividends and earnings per share expected to​ grow?

Answer 1

Given,

Expected dividend (D₁) = $ 2.87

Growth rate (g) = 4.2% or 0.042

Equity cost of capital (r_e) = 10.8% or 0.108

Solution :-

(a) may nard's share Price = - Di- de-g 13 $2.87 0.108 -0.042 - - $2.87 0.066 = $43.48484848 or $ 43.48 gor maynard's share price is $43.48 (b) since the total payout remains Constant, maynard's share price would be same as calculated in past (a), So, may hard's share price is $43.48

(0) Expected dividend (D) as per part (b) = $0.91 het, new growth rate be g, Now, Maynard's Share Price - - de- g buce Di $43.48484848 = $0.91 0.108 - g, 0.108 - g = $ 0.91 $43.48484848 0. 108- J = 0.0209268 0. 108 -0.0209268 - g, 0.0870732 = g, so g, = 0.0870732 or 0.087 1 or 8.71% Thus, maynard's dividends and earnings per share expected to grow at 8.71%