a. Calculate the future growth rate for Solarpower's earnings. b. If the investor's required rate of return for Solarpower's stock is 15 percent, what would be the price of Solarpower's common stock? c. What would happen to the price of Solarpower's common stock if it raised its dividends to $13 and then continued with that same dividend payout ratio permanently? Should Solarpower make this change? (Assume that the investor's required rate of return remains at 15 percent.)
a. Calculate the future growth rate for Solarpower's earnings. b. If the investor's required rate of return for Solarpower's stock is 15 percent, what would be the price of Solarpower's common stock? c. What would happen to the price of Solarpower's common stock if it raised its dividends to $13 and then continued with that same dividend payout ratio permanently? Should Solarpower make this change? (Assume that the investor's required rate of return remains at 15 percent.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
(Measuring growth) Solarpower Systems earned
return on equity of
$20
per share at the beginning of the year and paid out
$9
in dividends to shareholders (so,
D0=$9)
and retained
$11
to invest in new projects with an expected 19
percent. In the future, Solarpower expects to retain the same dividend payout ratio, expects to earn a return of
19
percent on its equity invested in new projects, and will not be changing the number of shares of common stock outstanding.a. Calculate the future growth rate for Solarpower's earnings.
b. If the investor's required rate of return for Solarpower's stock is
15
percent,
what would be the price of Solarpower's common stock?c. What would happen to the price of Solarpower's common stock if it raised its dividends to
$13
and then continued with that same dividend payout ratio permanently? Should Solarpower make this change? (Assume that the investor's required rate of return remains at
15
percent.)
d. What would happened to the price of Solarpower's common stock if it lowered its dividends to
dividend growth rate model work in this case? Why or why not? (Assume that the investor's required rate of return remains at
$3
and then continued with that same dividend payout ratio permanently? Does the constant 15
percent and that all future new projects will earn
19
percent.)Question content area bottom
Part 1
a. What is the future growth rate for Solarpower's earnings?
enter your response here%
(Round to two decimal places.)Part 2
b. If the investor's required rate of return for Solarpower's stock is
15%,
what would be the price of Solarpower's common stock?$enter your response here
(Round to the nearest cent.)Part 3
c. What would happen to the price of Solarpower's common stock if it had raised its dividends to
$13
(D0=
$13)
and then continued with that same dividend payout ratio permanently? $enter your response here
(Round to the nearest cent.)Part 4
Should Solarpower make this change? (Select from the drop-down menus.)
Solarpower
raise its dividend because the retention ratio will
and the value of the common stock will
.
▼
should
should not
▼
increase
decrease
▼
increase
decrease
Part 5
d. What would happen to the price of Solarpower's common stock if it had lowered its dividends to
$3
(D0=
$3)
and then continued with that same dividend payout ratio permanently?$enter your response here
(Round to the nearest cent.)Part 6
Does the constant dividend growth rate model work in this case? Why or why not? (Select the best choice below.)
No, the constant dividend growth rate model does not work in this case where the required return on the stock is less than the projected growth rate because it is not possible for a firm to grow at such an unsustainable lower rate while the enviroment that houses it can only grow at a higher rate.
No, the constant dividend growth rate model does not work in this case where the required return on the stock is greater than the projected growth rate because it is not possible for a firm to grow at such an unsustainable higher rate while the enviroment that houses it can only grow at a lower rate.
Yes, the constant dividend growth rate model works in this case where the required return on the stock is less than the projected growth rate because the firm's value will become negative when the ecomony that houses it experiences a substantial higher growth rate.
Yes, the constant dividend growth rate model works in this case where the required return on the stock is greater than the projected growth rate because the firm's value will become negative when the ecomony that houses it experiences a substantial lower growth rate.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education