Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $1
ID: 2769953 • Letter: R
Question
Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $1.2 out of annual earnings per share of $3.25. Currently, Rubenstein Bros.' stock is selling for $15.50 per share. Adhering to the company's target capital structure, the firm has $10 million in assets, of which 30% 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 18%, 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 $2.40 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 $1.2 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 $15.50. In other words, for every $15.50 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.
$ ---- per share
Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $1.2 out of annual earnings per share of $3.25. Currently, Rubenstein Bros.' stock is selling for $15.50 per share. Adhering to the company's target capital structure, the firm has $10 million in assets, of which 30% 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 18%, 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 $2.40 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 $1.2 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 $15.50. In other words, for every $15.50 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.
$ ---- per share
Explanation / Answer
1st question: Growth Rate:
Here growth rate = retention ratio * return on equity
retention ratio= Dividend per share / Earning per share - 1
= 1.2 / 3.25 = 0.3692-1 = 0.6307
Therefore growth rate = 0.6307*18 =0.11
2)
Stock's required rate of return:= D / S + G
D= Dvidend per share
S = current stock price
G = growth rate
Therfore stock's required rate of return = 1.2 / 15.5 + 0.11 = 0.77+0.11 = 18.7%
3) Growth rate if Dividend per share changes to = $2.40
retention rato = 2.40 / 3.25 -1 = 0.26
Growth rate = 0.26*18 = 0.047
4) Required rate of return:
= 2.40 / 15.5 + 0.047
= 20.18%
Please ask the next three questions in other question
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