DFB, Inc.,expects earnings this year of $5 per share, and it plans to

QUESTION

DFB, Inc.,expects earnings this year of $5 per share, and it plans to pay a $3 dividend toshareholders. DFB will retain $2 per share of its earnings to reinvest in new projects thathave an expected return of 15% per year. Suppose DFB will maintain the same dividendpayout rate, retention rate, and re¦
DFB, Inc.,expects earnings this year of $5 per share, and it plans to pay a $3 dividend to shareholders. DFB will retain $2 per share of its earnings to reinvest in new projects that have an expected return of 15% per year. Suppose DFB will maintain the same dividend payout rate, retention rate, and return on new investments in the future and will not change its number of outstanding shares. (a) What growth rate of earnings would you forecast for DFB? answer =6% =retension rate x return on invet= 2/5 x15%=6% (b) If DFBs equity cost of capital is 12%, what price would you estimate¦

or DFB stock? answer =50 DOLLARS = 3/(12%- 6%)=50 (c) Suppose instead that DFB paid a dividend of $4 per share this year and retained only $1 per share in earnings. If DFB maintains this higher payout rate in the future, what stock price would you estimate for the firm now? Should DFB raise its dividend? = 1/5 x15%=3% P=4/(12%- 3%)=44.44 DOLARS Should DFB raise its dividend? no positive NPV

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