Consider company ABC. Today it is the 1st of January 2022. The expected earnings of ABC (in million £) for the next few years (as per the 1st of January) are forecast to be: Year 2023 2024 2025 2026 2027 Expected Earnings 1 1.5 0.9 1.2 1.3 From year 2027 and onwards the earnings of ABC are expected to grow with a growth rate of 5%. The required rate of return of ABC is 12%. The dividend policy of ABC is currently such that they pay out 80% of their earnings as dividends, i.e. their earnings retention ratio b is constant and equals 0.2. The forecast of the growth rate is based on an earnings retention ratio of 0.2. Given the information above, provide a recommendation to the management of ABC as to whether they should increase/cut back on dividends. Motivate your answer.

Consider company ABC. Today it is the 1st of January 2022. The expected earnings of ABC (in million £) for the next few years (as per the 1st of January) are forecast to be: Year 2023 2024 2025 2026 2027 Expected Earnings 1 1.5 0.9 1.2 1.3 From year 2027 and onwards the earnings of ABC are expected to grow with a growth rate of 5%. The required rate of return of ABC is 12%. The dividend policy of ABC is currently such that they pay out 80% of their earnings as dividends, i.e. their earnings retention ratio b is constant and equals 0.2. The forecast of the growth rate is based on an earnings retention ratio of 0.2. Given the information above, provide a recommendation to the management of ABC as to whether they should increase/cut back on dividends. Motivate your answer.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter7: Valuation Of Stocks And Corporations

Section7.6: Valuing Nonconstant Growth Stocks

Problem 3ST

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Consider company ABC. Today it is 1st of January 2023 and ABC has just paid a dividend of £3 million. The expected earnings of ABC for the next 30 years are forecast to grow at a rate of 15% per annum. From 1st of January 2053 and onwards the earnings of ABC are expected to grow at a rate of 5%. The required rate of return of ABC is 12% per annum. The current dividend policy of ABC is such that they pay out 50% of its earnings as dividends (assume that they pay their dividends on 1st of January every year). Suppose that the dividend payout ratio is expected to stay constant in the future. What is the value of ABC stock? Show and explain your calculations and any assumptions you make.
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