It’s early morning on January 1st, 2008 and Mr Duby is thinking about investing in ABC stocks. ABC reported earnings per share (EPS) of $2 as of…

It’s early morning on January 1st, 2008 and Mr Duby is thinking about investing in ABC stocks. ABC reported earnings per share (EPS) of $2 as of December 31, 2007 but paid no dividends. Earnings are expected to grow at 16% per year for the following 4 years. ABC will start paying dividends for the first time on December 31, 2011, distributing 40% of its earnings to shareholders. Earnings growth will slow to 7.5% per year for the next 5 years (i.e. from January 1, 2012 through December 31, 2016). Starting December 31, 2016 ABC will pay out 70% of its earnings in dividends and earnings growth will stabilize at 2% per year forever. The required rate of return on ABC stock is 10%.

a.     How much should Mr. Pitt pay for a share of ABC stock given the above earnings and dividend forecast?

b.     What would be the value of the stock today if Mr Duby could convince ABC directors to change the company’s future dividend policy to pay out 100% of its December 31, 2016 earnings in dividends (i.e. the retention ratio would become 0%) and maintain this dividend policy forever? In other words, starting on December 31, 2016, should the company pay out all of its earnings in dividends instead of pursuing their growth strategy?

Show more

Calculate Your Essay Price
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more