You are trying to determine the optimal dividend policy for your all equity financed company using a PE multiples approach. You consider your company to be a stable growth rate firm. Your return on reinvested earnings is 14% and your required rate of return on equity is 20%. You have two choices: (i) pay a 90% dividend; or (ii) pay a 70% dividend. Which dividend policy maximizes the value of the company’s stock? Question 1 options: a) 90% dividend because it leads to a lower PE multiple b) 90% dividend because it leads to a higher PE multiple c) 70% dividend because it leads to a lower PE multiple d) 70% dividend because it leads to a higher PE multiple
You are trying to determine the optimal dividend policy for your all equity financed company using a PE multiples approach. You consider your company to be a stable growth rate firm. Your return on reinvested earnings is 14% and your required rate of return on equity is 20%. You have two choices: (i) pay a 90% dividend; or (ii) pay a 70% dividend. Which dividend policy maximizes the value of the company’s stock? Question 1 options: a) 90% dividend because it leads to a lower PE multiple b) 90% dividend because it leads to a higher PE multiple c) 70% dividend because it leads to a lower PE multiple d) 70% dividend because it leads to a higher PE multiple
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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Question
You are trying to determine the optimal dividend policy for your all equity financed company using a PE multiples approach. You consider your company to be a stable growth rate firm. Your return on reinvested earnings is 14% and your required rate of
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