Guff plc, an all-equity firm, has the following earnings per share and dividend history (paid annually). Year Dividend per share 8p 7.5p 7p Earnings per share 21p This year 18p last year 16p 2 years ago 6.5p 13p 3 years ago 4 years ago 14p 6p This year's dividend has just been paid and the next is due in one-year. Guff has an opportunity to invest in a new product, Stuff, during the next two years. The directors are considering cutting the dividend to 4p for each of the next two years to fund the project. However, the dividend in three years can be raised to 10p and will grow by 9% per annum thereafter due to the benefits from the investment. The company is focused on shareholder wealth maximisation and required a rate of return of 13% for its owners. Required a) If the directors chose to ignore the investment opportunity and dividends continued to grow at the historical rate what would be the value of one share using the dividend valuation model? b) If the investment is accepted, and therefore dividends are cut for the next two years, what will be the value of one share?

Guff plc, an all-equity firm, has the following earnings per share and dividend history (paid annually). Year Dividend per share 8p 7.5p 7p Earnings per share 21p This year 18p last year 16p 2 years ago 6.5p 13p 3 years ago 4 years ago 14p 6p This year's dividend has just been paid and the next is due in one-year. Guff has an opportunity to invest in a new product, Stuff, during the next two years. The directors are considering cutting the dividend to 4p for each of the next two years to fund the project. However, the dividend in three years can be raised to 10p and will grow by 9% per annum thereafter due to the benefits from the investment. The company is focused on shareholder wealth maximisation and required a rate of return of 13% for its owners. Required a) If the directors chose to ignore the investment opportunity and dividends continued to grow at the historical rate what would be the value of one share using the dividend valuation model? b) If the investment is accepted, and therefore dividends are cut for the next two years, what will be the value of one share?

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

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Rylan Industries is expected to pay a dividend of $5.00 year for the next four years. If the current price of Rylan stock is $31.38, and Rylan's equity cost of capital is 15%, what price would you expect Rylan's stock to sell for at the end of the four years? A. $83.78 B. $53.86 C. $23.94 D. $29.92
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