Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $0
ID: 2659799 • Letter: R
Question
Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $0.7 out of annual earnings per share of $5. Currently, Rubenstein Bros.' stock is selling for $14.00 per share. Adhering to the company's target capital structure, the firm has $12 million in assets, of which 45% is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of 14%, which is expected to continue this year and into the foreseeable future.- Based on that information, what long-run growth rate can the firm be expected to maintain? Round your answer to two decimal places. Do not round intermediate calculations. (Hint: g = Retention rate x ROE.)
% - What is the stock's required return? Round your answer to two decimal places. Do not round intermediate calculations.
% - If the firm changed its dividend policy and paid an annual dividend of $1.40 per share, financial analysts would predict that the change in policy will have no effect on the firm's stock price or ROE. Therefore, what must the firm's new expected long-run growth rate? Round your answer to two decimal places. Do not round intermediate calculations.
%
If this plan is implemented, what must the firm's required return be? Round your answer to two decimal places. Do not round intermediate calculations.
% - Suppose instead that the firm has decided to proceed with its original plan of disbursing $0.7 per share to shareholders, but the firm intends to do so in the form of a stock dividend rather than a cash dividend. The firm will allot new shares based on the current stock price of $14.00. In other words, for every $14.00 in dividends due to shareholders, a share of stock will be issued. How large will the stock dividend be relative to the firm's current market capitalization? (Hint: Remember market capitalization = P0 x number of shares outstanding.) Round your answer to two decimal places. Do not round intermediate calculations.
% - If the plan in Part d is implemented, how many new shares of stock will be issued? Round your answer to the nearest whole. Do not round intermediate calculations.
If the plan in Part d is implemented, by how much will the company's earnings per share be diluted? Round your answer to the nearest cent. Do not round intermediate calculations.
$
Explanation / Answer
1) retention rate = (5-0.7)/5 = 0.86
Growth rate = 0.86*14 = 12.04%
2)Stocks required return can be solved by solving the following equation
0.7*1.1204/(required rate of return-.1204) = 14
Return = 17.64%
3)retention rate = (5-1.4)/5 = 0.72
Growth rate = 0.72*14 = 10.04%
Stocks required return can be solved by solving the following equation
1.4*1.1008/(required rate of return-.1008) = 14
Return = 21.08
4)Firms book value of equity = 12*.55 = 6.6 = Market value
No. of shares = 6.6/14 = 471429 shares
Amount of dividend due = 471429*0.7 = 330000
5)No. of shares to be issued = 330000/14 = 23571
diluted earnings per share will be (5*471429)/(471429+23571) = 4.76
amount diluted= 5-4.76 = 0.24
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