Earnings per share-earnings and dividend forecast

Assignment Help Financial Management

Reference no: EM131308066

It’s early morning on January 1st, 2014 and Mr. Specter is thinking about investing in Alberta Oil Sands Corp. Alberta Oil Sands Corporation reported earnings per share (EPS) of $2 as of December 31, 2013 but paid no dividends. Earnings are expected to grow at 16% per year for the following 4 years. Alberta Oil Sands Corporation will start paying dividends for the first time on December 31, 2017, distributing 40% of its earnings to shareholders (the payout ratio will remain 40% for four more years). Earnings growth will slow down to 7.5% per year for the next 5 years (i.e. from January 1, 2018 through December 31, 2022). Starting on December 31, 2022 Alberta Oil 2 Sands Corporation will begin to pay out 70% of its earnings in dividends and earnings growth will stabilize at 2% per year forever. The required rate of return r on Alberta Oil Sands Corporation stock is 10%.

(a) How much should Mr. Specter pay for a share of Alberta Oil Sands stock given the above earnings and dividend forecast?

(b) Should Mr. Specter convince Alberta Oil Sands directors to change the company’s future dividend policy such that Alberta Oil Sands would pay out 100% of its December 31, 2022 earnings in dividends instead of pursuing their growth strategy and would then maintain this dividend policy forever?

Reference no: EM131308066

Questions Cloud

Detail both the pros and cons of the strategy : With a short term interest rates near 0 percent in early 2014, suppose the treasury decided to replace maturing notes and bonds by issuing new treasury bills, thus shortening the average maturity of US debt outstanding. Discuss in detail both the pro..

Net working capital will be recovered when the project ends : Harvin's Pharmas, a drug store chain with 12 locations in Gainesville, FL and Minneapolis, MN, is interested in placing automatic aspirin dispensers in their stores for chronic headache sufferers. The net working capital will be recovered when the pr..

What is the expected annual rate of dividend growth : Trench Connection U.K. Ltd (TCUK) has just paid a per share dividend of $2. Its stock is priced at $26 today (Assume that the stock price is ex dividend, i.e., the $26 price does not include the $2 dividend just paid). What is the expected annual rat..

Calculate the net present value of growth opportunities : The current market price of Canadian Fire Sale Corp. equity is $30 per share. Analysts estimate that Canadian Fire Sale will report earnings-per-share (EPS1) of $2.50 in one year. The required return on Canadian Fire Sale shares is 10 percent. Calcul..

Earnings per share-earnings and dividend forecast : It’s early morning on January 1st, 2014 and Mr. Specter is thinking about investing in Alberta Oil Sands Corp. Alberta Oil Sands Corporation reported earnings per share (EPS) of $2 as of December 31, 2013 but paid no dividends. How much should Mr. Sp..

What is the expected rate of dividend growth : Analysts expect that H.O.T. Ltd will report earnings of $300 million one year from today. H.O.T.’s policy is to pay 75% of its earnings out in dividends (it paid its dividends already for this year). The company has 60,000,000 shares outstanding and ..

What should be the optimal payout policy of this firm : The required rate of return on ABC’s equity is 8%, the current plowback ratio is 40%, and the next year’s dividend is $2 per share. Assume ROE=8%. What is the current stock price? What will be the stock price if the plowback ratio changes to 20%? Wha..

Provding venture capital for software devlopment : Hart Venture Capital (HVC) specializes in provding venture capital for software devlopment and Internet applications. Currently HVC has two investment opportunities: (1) Security Systems, a firm that needs additional capital to develop an Internet se..

Clemens will increase its investment at a later date : Clemens Inc. is considering a $100 million investment in a new line of soft drinks. However, $100 million is a huge investment for Clemens; if things turn bad, it could wipe out the company. A few senior managers have suggested a smaller investment o..

User Account

All Pages