Woozles Inc. expects to have earnings per share of $8 in the coming years.
a. Suppose rather than reinvesting these earnings and grow, the firm plans to pay out all earnings as dividends. If shareholders have a required return of 9%, what is Woozles’s current share price?
b. Suppose after a few years of following the dividend policy stated in a., Woozles Inc. decides to open new stores in Dartmouth. In order to fund these new stores, they decide to reduce their dividend payout ratio to 65% and use the retained earnings to open the new stores. This new dividend policy would mean that the first dividend paid would be $5.20 and would allow the company to grow at a constant rate of 5.25% per year. Assuming the risk does not change and the required return stays at 9%, what will Woozles’s stock price be with the new policy? Show your work.