_DFB, Inc. expects earnings next year of $ 4.45 per_ share, and it plans to pay a $ 2.24 dividend to shareholders_ (assu…

_DFB, Inc. expects earnings next year of $ 4.45 per_ share, and
it plans to pay a $ 2.24 dividend to shareholders_ (assume that is
one year from_ now). DFB will retain $ 2.21 per share of its
earnings to reinvest in new projects that have an expected return
of 15.2 % per year. Suppose DFB will maintain the same dividend
payout_ rate, retention_ rate, and return on new investments in the
future and will not change its number of outstanding shares. Assume
next dividend is due in one year. a. What growth rate of earnings
would you forecast for_ DFB? b. If_ DFB’s equity cost of capital is
11.1 %_, what price would you estimate for DFB_ stock? c. Suppose
instead that DFB paid a dividend of $ 3.24 per share at the end of
this year and retained only $ 1.21 per share in earnings. That_ is,
it chose to pay a higher dividend instead of reinvesting in as many
new projects. If DFB maintains this higher payout rate in the_
future, what stock price would you estimate for the firm_ now?
Should DFB raise its_ dividend?

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