Consider company ABC. Today it is 1st of January 2023 and ABC has just paid a dividend of £3 million. The expected earnings of ABC for the next 30 years are forecast to grow at a rate of 15% per annum. From 1st of January 2053 and onwards the earnings of ABC are expected to grow at a rate of 5%. The required rate of return of ABC is 12% per annum. The current dividend policy of ABC is such that they pay out 50% of its earnings as dividends (assume that they pay their dividends on 1st of January every year). a) Suppose that the dividend
Consider company ABC. Today it is 1st of January 2023 and ABC has just paid a dividend of £3 million. The expected earnings of ABC for the next 30 years are
The current dividend policy of ABC is such that they pay out 50% of its earnings as dividends (assume that they pay their dividends on 1st of January every year).
a) Suppose that the dividend payout ratio is expected to stay constant in the future. What is the value of ABC stock? Show and explain your calculations and any assumptions you make.
b) Just after the dividend payment on 1st of January 2043, ABC is planning to reduce their dividends and only pay out 40% of its earnings. What is the value of ABC under the new dividend policy?
c) Provide a recommendation to the management of ABC as to whether they should increase/cut back on dividends in the future. Can the dividend policy of ABC (in part b)) be improved on? Motivate your answer.
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