Payout Policy. House of Haddock has 5,000 shares outstanding and the stock price is $100. The company is expected to pay a dividend of $20 per share next year, and thereafter, the dividend is expected to grow indefinitely by 5% a year. The president, George Mullet, now makes a surprise announcement: He says that the company will henceforth distribute half the cash in the form of dividends and the remainder will be used to repurchase stock. a. what should be the total value of the company before the announcement? b. what should be the total value after the announcement? c. what must be the expected rate of return on equity? d. what is the new growth rate in the dividend stream? (check your estimate of share value by discounting this stream of dividends per share)

Payout Policy. House of Haddock has 5,000 shares outstanding and the stock price is $100. The company is expected to pay a dividend of $20 per share next year, and thereafter, the dividend is expected to grow indefinitely by 5% a year. The president, George Mullet, now makes a surprise announcement: He says that the company will henceforth distribute half the cash in the form of dividends and the remainder will be used to repurchase stock. a. what should be the total value of the company before the announcement? b. what should be the total value after the announcement? c. what must be the expected rate of return on equity? d. what is the new growth rate in the dividend stream? (check your estimate of share value by discounting this stream of dividends per share)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 25P

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