Reference no: EM132746034

Kenneth Cole Productions (KCP), an all-equity financed firm, just reported EPS of $4.43 in 2018. Despite the economic downturn, KCP is confident regarding its current investment opportunities. But due to the crisis, KCP does not wish to fund these investments externally. The Board has therefore decided to suspend its stock repurchase plan and cut its dividend to $1.44 per share (vs. almost $2 per share in 2017), and retain these funds instead. The firm has just paid the 2018 dividend, and KCP plans to keep its dividend at $1.44 per share in 2019 as well. In subsequent years, it expects its growth opportunities to slow, and it will still be able to fund its growth internally with a target 45% dividend payout ratio, and reinitiating its stock repurchase plan for a total payout rate of 58%. (All dividends and repurchases occur at the end of each year.) Suppose KCP's existing operations will continue to generate the current level of earnings per share in the future. Assume further that the return on new investment is 15%, and that reinvestments will account for all future earnings growth (if any). Finally, assume KCP's equity cost of capital is 10%.

Problem a) Estimate KCP's EPS in 2019 and 2020 (before any share repurchases).

Problem b) What is the value of a share of KCP at the start of 2009?