ALTERNALTIVE DIVIDEND POLICY- Rubenstein Bros. Clothing is expecting to pay an a

Question

ALTERNALTIVE DIVIDEND POLICY-

Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $1.5 out of annual earnings per share of $3.5. Currently, Rubenstein Bros.' stock is selling for $11.00 per share. Adhering to the company's target capital structure, the firm has $12 million in assets, of which 30% 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 15%, which is expected to continue this year and into the foreseeable future.............................................

a.) Based on that 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.) ________%....................................

b.) What is the stock's required return? Round your answer to two decimal places. Do not round intermediate calculations. ___________ %........................................................

c.) If the firm changed its dividend policy and paid an annual dividend of $3.00 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. __________%............................................................

d.) 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. ____________ %........................................................................

e.) Suppose instead that the firm has decided to proceed with its original plan of disbursing $1.5 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 $11.00. In other words, for every $11.00 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. _________ %

Explanation / Answer

payout ratio= DPS/EPS= 1.5/3.5= .4286 Therefore Retention ratio= (1-.4286)= .5714 or 57.14% growth rate= 15%x57.14%= 8.57%

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