A company expects to have earnings per share of $10 in the coming year. Rather than reinvest these earnings and grow, the firm plans to pay out all of its earnings as a dividend. With these expectations of no growth, the current share price is $100. Suppose now that the company could set the dividend payout rate to 50% for the future and use the retained earnings to open new stores. The return on its investment in these stores is expected to be 15%. With other things being equal, what effect would this new policy have on the stock price?
With other things being equal, if the return on its investment in these stores is expected to be 8%. what effect would this new policy have on the stock price?