Business
Business, 13.03.2020 22:16, madelinemg02

DFB, Inc.,expects earnings this year of $5 per share, and it plans to pay a $3 dividend toshareholders. DFB will retain $2 per share of its earnings to reinvest in new projects thathave an expected return of 15% per year. Suppose DFB will maintain the same dividendpayout rate, retention rate, and return on new investments in the future and will not change itsnumber of outstanding shares.(a) What growth rate of earnings would you forecast for DFB?(b) If DFB's equity cost of capital is 12%, what price would you estimate for DFB stock?(c) Suppose instead that DFB paid a dividend of $4 per share this year and retained only $1per share in earnings. If DFB maintains this higher payout rate in the future, what stock pricewould you estimate for the firm now? Should DFB raise its dividend?

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