Compute the price of the stock under the two plans

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The Vinson Corporation has earnings of $046,000 with 320.000 shares outstanding. lts PIE ratio is ‘16. The ?rm is holding 5410.000 of funds to invest or pay out in dividends. If the funds are retained. the aftertax retum on investment will be 20 percent. and this will add to present earnings. The 20 percent is the ncrrnal return anticipated for the corporation, and the Pl E ratio would remain unchanged. If the funds are paid out in the form of dividends. the PE ratio will increase by 10 percent because the stockholders in this corporation have a preference for dividends over retained earnings.

a. Compute the price of the stock under the two plans. [Do not round intermediate calculations and round your answers to 2 decimal places.)

Reten?on plan

Payout plan

b. Which plan will maximize the market value of the stock?

Retention plan

Payout plan

Reference no: EM131973609

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