Chapter 7, Problem 27P

Maynard Steel plans to pay a dividend of $3 this year. The company has an expected earnings growth rate of 4% per year and an equity cost of capital of 10%.

a. Assuming that Maynard's dividend payout rate and expected growth rate remain constant, and that the firm does not issue or repurchase shares, estimate Maynard's share price.

b. Suppose Maynard decides to pay a dividend of $1 this year and to use the remaining $2 per share to repurchase shares. If Maynard's total payout rate remains constant, estimate Maynard's share price.

c. If Maynard maintains the dividend and total payout rate given in (b), at what rates are Maynard's dividends and earnings per share expected to grow?