Question:
Abc has an all common equity capital structure.it has 200,000 shares outstanding at a par of $2.00. growth expectations have lowered .previously it plowed back most of its earnings which earned 12% per year.The future growth rate will be 5% and dividends would increase.New investments that would earn a required 14% would amount to $800,000.in 2006,net income would be $2 million .If a 20% payout were continued ,retained earnings would be $1.6 million in 2006.High earnings from existing assets are expected to continue.
(a) Assuming that the acceptable 2006 projects would be financed by retained earnings during the year calculate DPS.
(b) What payout ratio does the answer to part A imply for 2006?
(c) If a 60% payout ratio is continued ,what is your estimate of the present market price of the common stock?