(5 marks) Eggbert\'s company just generated total earnings of $100 today and aft

Question

(5 marks) Eggbert's company just generated total earnings of $100 today and after repurchasing shares, there are currently 10 shares outstanding. The company's return on new investment is 10%. The retention rate is 50%, but the firm uses 2 of earnings to repurchase shares each year. Consider the total payout model and assume that the cost of capital is 10%. 7. 0% a) (1 mark) What is the dividend payout ratio? b) (1 mark) What is the growth rate of dividends? c) (1 mark) What is the total amount dividend to be paid one year from now? d) (1 mark) What is the total payout amount one year from now? e) (1 mark) What is the price per share today? Page 4 of 7

Explanation / Answer

a) Dividend payout ratio = 1- retention ratio - percentage of earning used for repurchase years
= 1 - 50% - 20% = 30%

b) Growth rate of dividends = Return on new investment * Retention ratio = 10% * 0.5 = 5%

c) Total Dividend paid one year from now = Dividend payout ratio * Total Earning * ( 1+ growth rate)
= 0.3 * 100 * ( 1+ 5%) = 31.5

d)Total Payout amount after one year = (Dividend payout ratio + Share Repurchase ratio) * Total Earnings * ( 1+growth rate) = (0.3+0.2)* 100* ( 1+5%) = 52.5

e) Price per share today = ( Dividend + Share purchase amount)/( Return on new investment - growth)
= (52.5)/(10%-5%) = 1050

Best of Luck. God Bless

  

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