Kodak used to primarily produce and distribute photographic paper and developing
ID: 2744097 • Letter: K
Question
Kodak used to primarily produce and distribute photographic paper and developing materials for traditional (i.e., non digital) photographic methods. A sizable portion of their business was home photography. Since they were one of the few suppliers of such materials, as the population grew, so did the demand for their product. Consider the value of Kodak in 1970. At that time, the investment capital per share (ICPS) for Kodak was $20. Given their market power, their return on investment was 15%. During that time, the required rate of return on Kodak was .14. In 1970, the policy of Kodak was to plowback 25 percent of its earnings per share. 5. (2pts) If Kodak increased its plowback ratio in 1970, what would have happened to their stock price? Circle one. go up go down no change cannot tell without more information Explain your answer.
Explanation / Answer
If Kodak increased its plowback ratio in 1970, there would be " NO CHANGE" in their Stock Price as the
1) Kodak was in the business of home photgraphy and there are few players in their field.
2) Kodak's product is in demand and having a good growth rate.
3) The company is growing so they require more earnings plough-back.
4) The Kodak's EPS and Book value of share is growing at 15% .
5) For the investors, there is no difference between whether Dividend ratio increases or plough-back ratio, so that the Book Value of the Share.
Thus, as the book value of the share is growing and the investors do not differentiate between the growth in the dividend or the book value of the share, so the Kodak can increase the plough-back ratio without affecting the stock price.
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