Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $1
ID: 2770081 • 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
Retention rate=1- dividend payout rate
Annual dividend=1.2
Earnings per share=3.25
Dividend payout rate=Dividend per share/Earning per share=1.2/3.25=0.3692
Retention rate=1-.3692=.6307
Retention rate=63.07%
Growth rate=18% *63.07%=11.3526%
Here we will use the dividend discount model to find the required rate of return on stock.
Stock price=Dividend/Required rate of return
Required rate of return on equity=ROE=Cost of equity=18%
Stock price=1.2/.18=6.67 per share
New long term growth rate=ROE * New retention ratio
Dividend payout ratio=2.4/3.25=0.7384=73.84%
Retention ratio=1-0.7384=0.2615=26.15%
Growth rate=18% *26.15%=4.707%
There will be no change in stock price and ROE due to Plan B.
We will use the dividend discount model to calculate the new required rate of return .
Stock price=Annual dividend/ Required rate of return
15.50=2.4/k
K=15.48%
10,000,000=3,000,000+7,000,000
Firm’s book value of equity is equal to market value
Hence book value of equity=7,000,000
Stock price=market value of share capital/outstanding number of shares
15.50=7,000,000/N
N=451613 shares
Dividend per share=2.4
Total cash dividend due=Number of shares *dividend per share=451613*2.4=1083871
Now ,if company does not pay cash dividend and pays stock dividend, for every 15.50 amount of cash dividend due, one share will be issued.
For every 15.50 of cash dividend , stock dividend =1
For 1083871 worth of cash dividend, stock dividend=1083871/15.50=69927 shares
Value of stock dividend=69927*15.50=1083871.2
Market capitalization=7,000,000
Relative % of stock dividend to market cap=1083871.2/7000000*100=15.48%
6. Number of new shares issued=69927
Same amount of earnings will now be distributable amongst a larger number of shares.
Before stock dividend
EPS =3.25
Number of outstanding shares=451613
Total earnings distributable amongst 451613 shares=1467742.25
After stock dividend
Number of outstanding shares=451613+69927=521540
New EPS=1467742.25/521540=2.81
Change in EPS=3.25-2.81=0.44
% change in EPS=Change /Original *100=0.44/3.25*100=13.53%
EPS diluted by 13.53%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.