Assuming yourself to be Anna, narrate what you would have read in the file. Your narrative should include answers to the following: Note: 1 Retention ratio = 1 – Dividend payout ratio a) Does the fact that Chatterbox will allow only a 70% payout from the next period, allows it to grow? If so, what will be the growth rate if the firm successfully meets the investor expectation about the return on equity
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.
Assuming yourself to be Anna, narrate what you would have read in the file. Your narrative should include answers to the following:
Note: 1 Retention ratio = 1 – Dividend payout ratio
a) Does the fact that Chatterbox will allow only a 70% payout from the next period, allows it to grow? If so, what will be the growth rate if the firm successfully meets the investor expectation about the
![SHORT CASE 1 - THE WINNING POLICY
Tina has a junior colleague, Wesley. He is studying the financial information of Chatterbox Inc. when he finds
that the firm follows a 100% dividend payout policy, implying a zero growth rate. Chatterbox has an EBIT of
$15,000,000 with an interest liability of $5,000,000 and is subject to a tax rate of 34% on its earnings. The
number of outstanding shares are 1,200,000. The required return on equity is 14% and all cash flows are
perpetuties.
The financial report that Wesley is studying also mentions that the firm may shift to a 70% dividend payout
policy by the time the next dividend is due. The argument is that by doing this, Chatterbox will have more
retained earnings that can be ploughed back in the company to serve the need to grow faster, where;
Growth (g) = Retention ratio' x actual return on equity.
Wesley also notes that the Chatterbox stock is trading for its fair price, which he computes as approximately
S39. He is wondering if, instead of a full payout, the policy changed to a 70% payout, would it rock the stock
price?
When Tina arrives at the scene, she sees Wesley lost in thought and decides to resolve his confusion. She
starts by first of all checking whether Wesley has computed the correct stock price. After having done so, she
demonstrates to Wesley the underlying dynamics about dividend payout, retained earnings, growth rate, the
actual return on equity, the required return on equity, stock price of a firm and by extension, its value.
At the end of the day, Wesley is happy to have found Tina as a senior colleague and returns home with a file
that contains the entire analysis that Tina would have done for him. He then produly shows off the file to his
younger sister, Anna, and passes it off as his own work. Anna is a final year student in the finance stream at
the university and decides to read through the file contents after supper.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3ab052ac-b7ed-4ca4-b82d-ee839fd4bda7%2Fbc13cc3b-3039-418b-a082-651ea319890e%2Ffgh2lj_processed.png&w=3840&q=75)
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