What will be next years earnings per share

Reference no: EM133616047

Problem

Question I: Chicago Paints Corporation has a target capital structure of 40 percent debt and 60 percent common equity. The company expects to have $600 of after-tax income during the coming year, and it plans to retain 30 percent of its earnings. The current stock price is P0 = $30, the last dividend paid was D0 = $2.00, and the dividend is expected to grow at a constant rate of 7 percent. New stock can be sold at a flotation cost of F = 25%. What will Chicago Paints' marginal cost of equity capital be if it raises a total of $500 of new capital?

Question II: Growth and Earnings

Rowell Products' stock is currently selling for $60 a share. The firm is expected to earn $5.40 per share this year and to pay a year-end dividend of $3.60.

1. If investors require a 9 percent return, what rate of growth must be expected for Rowell?

2. If Rowell reinvests retained earnings in projects whose average return is equal to the stock's expected rate of return, what will be next year's earnings per share?

Reference no: EM133616047

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