Sunnyfax Publishing pays out all its earnings and has a share price of $38. In o

Question

Sunnyfax Publishing pays out all its earnings and has a share price of $38. In order to expand, Sunnyfax Publishing decides to cut its dividend from $3.00 to $2.00 per share and reinvest the retained funds. Once the funds are reinvested, they are expected to grow at a rate of 12%. If the reinvestment does not affect Sunnyfax's equity cost of capital, what is the expected share price as a consequence of this decision? a) $33.33 b) $46.50 c) $53.40 d) $61.96 How to solve this problem? Looking for process! Big Thx!

Explanation / Answer

cost of capital = 3/38 = 0.789;

g = 0.33x 0.12 = 0.0396;

P0 = 2 / (0.0789 -0.0396) = $50.89

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