Royal Corp. just paid an annual dividend of 3 dollars per share, this is based o

Question

Royal Corp. just paid an annual dividend of 3 dollars per share, this is based on a 40 percent divident payout ratio (3 dollars was 40 percent of total earnings per share). They expect that earnings will grow at a 3% rate, forever, and they don't expect that the dividend payout ratio will change. There are 200 million shares of common stock outstanding. There is a required rate of 16% on stock.

They are considering a new invesment that has an NPV of 50 mil. What will be the new stock price and P/E ratio?

Explanation / Answer

CURRENT STOCK PRICE = 23.77

CURRENT P/E RATIO = 3.17

NEW DIVIDEND = 3.1

NEW STOCK PRICE = 24.56

NEW P/E RATIO = 3.27

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