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shares, then the firm has declared a:stock dividend of 5%.cash dividend of $1 per share.stock repurchase of 5%.cash dividend of $1.60 a share which you reinvested in shares.
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increase its future growth rate.
| P0 | = | D1 |
| Ke − g |
| P0 = Price of the stock today |
| D1 = Dividend at the end of the first year |
| D1 = D0 × (1 + g) |
| D0 = Dividend today |
| Ke = Required rate of return |
| g = Constant growth rate in dividends |
| D0 is currently $2.90, Ke is 9 percent, and g is 6 percent. |
| Under Plan A, D0 would be immediately increased to $3.30 and Ke and g will remain unchanged. |
| Under Plan B, D0 will remain at $2.90 but g will go up to 7 percent and Ke will remain unchanged. |
| a. | Compute P0 (price of the stock today) under Plan A. Note D1 will be equal to D0 × (1 + g) or $3.30 (1.06). Ke will equal 9 percent, and g will equal 6 percent. (Round your intermediate calculations and final answer to 2 decimal places.) |
| Stock price for Plan A | $ |
| b. | Compute P0 (price of the stock today) under Plan B. Note D1 will be equal to D0 × (1 + g) or $2.90 (1.07). Ke will be equal to 9 percent, and g will be equal to 7 percent. (Round your intermediate calculations and final answer to 2 decimal places.) |
| Stock price for Plan B | $ |
| c. | Which plan will produce the higher value? |
| Plan APlan B |
Question
Assume its balance sheet is as follows:
| Assets | ||
| Cash | $ | 410,000 |
| Accounts receivable | 806,000 | |
| Fixed assets | 1,007,000 | |
| Total assets | $ | 2,223,000 |
| Liabilities and Stockholders’ Equity | ||
| Accounts payable | $ | 542,000 |
| Long term payable | 307,000 | |
| Common stock (305,000 shares at $2 par) | 610,000 | |
| Retained earnings | 764,000 | |
| Total liabilities and stockholders’ equity | $ | 2,223,000 |
| a-1. | From a legal perspective, what is the maximum amount of dividends per share the firm could pay? (Do not round intermediate calculations and round your answer to 2 decimal places.) |
| Dividends per share | $ |
| a-2. | Is this realistic? |
| YesNo |
| b. | In terms of cash availability, what is the maximum amount of dividends per share the firm could pay? (Do not round intermediate calculations and round your answer to 2 decimal places.) |
| Dividends per share | $ |
| c. | Assume the firm earned an 15 percent return on stockholders’ equity last year. If the board wishes to pay out 40 percent of earnings in the form of dividends, how much will dividends per share be? (Do not round intermediate calculations and round your answer to 2 decimal places.) |
| Dividends per share | $ |
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