What stock price would estimate? now

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DFB, Inc., expects earnings this year of $5.00 per? share, and it plans to pay a $3.00 dividend to shareholders. DFB will retain $2.00 per share of its earnings to reinvest in new projects with an expected return of 15.0% per year. Suppose DFB will maintain the same dividend payout? rate, retention? rate, and return on new investments in the future and will not change its number of outstanding shares.

Problem a. What growth rate of earnings would you forecast for? DFB?

Problem b. If? DFB's equity cost of capital is 12.0%?, what price would you estimate for DFB? stock?

Problem c. Suppose DFB instead paid a dividend of $4.00 per share this year and retained only $1.00
per share in earnings. That? is, it chose to pay a higher dividend instead of reinvesting in as many new projects. If DFB maintains this higher payout rate in the? future, what stock price would you estimate? now? Should DFB follow this new? policy?

Reference no: EM132915124

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