a. Based on this information, what long-run growth rate can the firm be expected to maintain? (Hint: g = Retention rate x ROE.) Do not round intermediate calculations. Round your answer to two decimal places. % 4 b. What is the stock's required return? Do not round intermediate calculations. Round your answer to two decimal places. % ruture. c. If the firm changed its dividend policy and paid an annual dividend of $1.60 per share, financial analysts would predict that the change in policy will have no effect on the firm's stock price or ROE. Therefore, what must the firm's new expected long-run growth rate? Do not round intermediate calculations. Round your answer to two decimal places. % If this plan is implemented, what must the firm's required return be? Do not round intermediate calculations. Round your answer to two decimal places. % d Su d that the 6
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
![Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $0.80 out of annual earnings per share of $2.50. Currently, Rubenstein Bros.' stock is selling for $11.00 per share. Adhering to the company's target capital structure, the firm has $8 million in total invested capital, of which 50% is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of 17%, which is expected to continue this year and into the foreseeable future.
a. Based on this information, what long-run growth rate can the firm be expected to maintain? (Hint: \( g = \text{Retention rate} \times \text{ROE} \).) Do not round intermediate calculations. Round your answer to two decimal places.
b. What is the stock's required return? Do not round intermediate calculations. Round your answer to two decimal places.
c. If the firm changed its dividend policy and paid an annual dividend of $1.60 per share, financial analysts would predict that the change in policy will have no effect on the firm's stock price or ROE. Therefore, what must the firm's new expected long-run growth rate be? Do not round intermediate calculations. Round your answer to two decimal places.
\- If this plan is implemented, what must the firm's required return be? Do not round intermediate calculations. Round your answer to two decimal places.
d. Suppose instead that the firm has decided to proceed with its original plan of disbursing $0.80 per share to shareholders, but the firm intends to do so in the form of a stock dividend rather than a cash dividend. The firm will issue new shares based on the current stock price of $11.00. In other words, for every $11.00 in dividends due to shareholders, a share of stock will be issued. How large is the stock dividend relative to the firm's current market capitalization? (Hint: Remember market capitalization = P0 × number of shares outstanding.) Do not round intermediate calculations. Round your answer to two decimal places.
e. If the plan in part a is implemented, how many new shares of stock will be issued? Do not round intermediate calculations. Round your answer to the nearest whole number.
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f. If the plan in part e is implemented, by how much will](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fbcd2d27a-56f0-42f1-82ee-dc77a8a42b09%2F2a88584a-1e28-4ae7-99d3-a9940c03c954%2Fknaie6f_processed.jpeg&w=3840&q=75)
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