The Vinson Corporation has earnings of $979,000 with 340,000 shares outstanding. Its P/E ratio is 18. The firm is holding $460,000 of funds to invest or pay out in dividends. If the funds are retained, the aftertax return on investment will be 20 percent, and this will add to present earnings. The 20 percent is the normal return anticipated for the corporation, and the P/E ratio would remain unchanged. If the funds are paid out in the form of dividends, the P/E ratio will increase by 10 percent because the stockholders in this corporation have a preference for dividends over retained earnings.
a. Compute the price of the stock under the two plans. (Do not round intermediate calculations and round your answers to 2 decimal places.)
Retention Plan-
Payout Plan-
b. Which plan will maximize the market value of the stock?
Retention plan
Payout plan