Surf & Turf Hotels is a mature business, although it pays no cash dividends. Nex
ID: 2717392 • Letter: S
Question
Surf & Turf Hotels is a mature business, although it pays no cash dividends. Next year’s earnings are forecasted at $56 million. There are 10 million outstanding shares. The company has traditionally paid out 50% of earnings by repurchases and reinvested the remaining earnings. With reinvestment, the company has generated steady growth averaging 5% per year. Assume the cost of equity is 12%.
Calculate Surf & Turf ’s current stock price, using the constant-growth DCF model. (Hint: Take the easy route and value overall market capitalization.) (Do not round intermediate calculations. Round your answer to the nearest whole number.)
Now Surf & Turf ”s CFO announces a switch from repurchases to a regular cash dividend. Next year’s dividend will be $2.80 per share. The CFO reassures investors that the company will continue to pay out 50% of earnings and reinvest 50%. All future payouts will come as dividends, however. What would you expect to happen to Surf & Turf ’s stock price? (Do not round intermediate calculations. Round your answer to the nearest whole number.)
a.Calculate Surf & Turf ’s current stock price, using the constant-growth DCF model. (Hint: Take the easy route and value overall market capitalization.) (Do not round intermediate calculations. Round your answer to the nearest whole number.)
Explanation / Answer
Ans) Forecated Earning = 56 Million Outstading Shared = 10 Million Cost of Equity = 12% Growth = 5% Market Capitalisation = 56/0.12-0.05 Market Capitalisation = 800 Current Stock Price = 800/10 $ 80 B) Forecated Earning = 56 Million Outstading Shared = 10 Million Dividend = 2.8 Value of Share = D1/ Ke-G = 2.8/0.12-0.05 = $ 40
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