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Components Manufacturing Corporation (CMC) has an all-common-equity capital structure. It has 200,000 shares of $2 par value common stock outstanding. Future growth at a 6% rate is considered realistic, but that level would call for an increase in the dividend payout. Further, it now appears that new investment projects with at least the 14% rate of return required by CMC's stockholders (rs = 14%) would amount to only $800,000 for 2009 compared to a projected $2,000,000 of net income.
Required:
Problem 1: Assuming that the acceptable 2009 investment projects would be financed entirely by earnings retained during the year and assuming that CMC uses the residual dividend model, calculate DPS in 2009.
Problem 2: What payout ratio does your answer to Part a imply for 2009?
Problem 3: If a 60% payout ratio is maintained for the foreseeable future, what is your estimate of the present market price of the common stock?
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