Alternative dividend policies-stock required return

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Reference no: EM131599744

Alternative dividend policies

Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $1.05 out of annual earnings per share of $3.75. Currently, Rubenstein Bros.' stock is selling for $10.00 per share. Adhering to the company's target capital structure, the firm has $10 million in total invested capital, of which 35% 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 19%, which is expected to continue this year and into the foreseeable future.

Based on this 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.)

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

If the firm changed its dividend policy and paid an annual dividend of $2.10 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.

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.

Suppose instead that the firm has decided to proceed with its original plan of disbursing $1.05 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 $10.00. In other words, for every $10.00 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.

If the plan in part d is implemented, how many new shares of stock will be issued? Round your answer to the nearest whole dollar. Do not round intermediate calculations.

If the plan in part d is implemented, by how much will the company's earnings per share be diluted? Round your answer to the nearest cent. Do not round intermediate calculations.

$ per share

Reference no: EM131599744

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