Defenestration Industries plans to pay a $4.00 dividend this year and you expect

Question

Defenestration Industries plans to pay a $4.00 dividend this year and you expect that the firm's earnings are on track to grow at 5% per year for the foreseeable future. Defenestration's equity cost of capital is 13%. 27) Suppose that Defenestration decides to pay a dividend of only $2 per share this year and use the remaining $2 per share to repurchase stock. If Defenestration maintains this dividend and total payout rate, then the rate at which Defenestration's dividends and earnings per share are expected to grow is closest to A)5% B) 7% 13% D) 9%

Explanation / Answer

Option D
Stock price=4/(0.13-0.05)=50
The price with dividend and repurchase will remain the same at 50
growth rate of dividends and earnings=cost of equity-Dividend/Price=13%-2/50=9%

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