Consider company ABC. Today it is the 1st of January 2022. The expected earnings of ABC (in million £) for the next few years (as per the 1st of January) are forecast to be: Year 2023 2024 2025 2026 2027 Expected Earnings 1 1.5 0.9 1.2 1.3 From year 2027 and onwards the earnings of ABC are expected to grow with a growth rate of 5%. The required rate of return of ABC is 12%. The dividend policy of ABC is currently such that they pay out 80% of their earnings as dividends, i.e. their earnings retention ratio b is constant and equals 0.2. The forecast of the growth rate is based on an earnings retention ratio of 0.2. Given the information above, provide a recommendation to the management of ABC as to whether they should increase/cut back on dividends. Motivate your answer.
Consider company ABC. Today it is the 1st of January 2022. The expected earnings of ABC (in million £) for the next few years (as per the 1st of January) are forecast to be: Year 2023 2024 2025 2026 2027 Expected Earnings 1 1.5 0.9 1.2 1.3 From year 2027 and onwards the earnings of ABC are expected to grow with a growth rate of 5%. The required rate of return of ABC is 12%. The dividend policy of ABC is currently such that they pay out 80% of their earnings as dividends, i.e. their earnings retention ratio b is constant and equals 0.2. The forecast of the growth rate is based on an earnings retention ratio of 0.2. Given the information above, provide a recommendation to the management of ABC as to whether they should increase/cut back on dividends. Motivate your answer.
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
- Consider company ABC. Today it is the 1st of January 2022. The expected earnings of ABC (in million £) for the next few years (as per the 1st of January) are
forecast to be:
|
Year |
2023 |
2024 |
2025 |
2026 |
2027 |
|
Expected Earnings |
1 |
1.5 |
0.9 |
1.2 |
1.3 |
From year 2027 and onwards the earnings of ABC are expected to grow with a growth rate of 5%. The required
- Given the information above, provide a recommendation to the management of ABC as to whether they should increase/cut back on dividends. Motivate your answer.
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