1. Southern Foods just paid an annual dividend of $3.10 a share. Management estimates the dividend will increase by 4 percent for one year then 8 percent for two years then 2% forever. The required rate of return is 12 percent. What is the value of this stock today?
2. A company has a required return of 16%, a profit margin of 3%, a D/E ratio of 1 and total asset turnover of 2 and just paid a $3.00 Dividend.
A) The company has a dividend payout ratio of 20%; calculate the price and forward P/E ratio.
B) If the company changed its dividend payout ratio to 40%, calculate the price and forward P/E ratio?
C) Explain why the price and P/E ratio increased or decreased. What variables are critical to determine if they should increase or decrease their dividend payout ratio? (Hint be specific what variables do you need to know.)