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Home / Questions / RFK Limited expects earnings this year of \$482 per share, and it plans to pay

# RFK Limited expects earnings this year of \$482 per share, and it plans to pay

RFK Limited expects earnings this year of \$4.82 per share, and it plans to pay a \$2.80 dividend to shareholders. RFK will retain \$2.02 per share of its earnings to reinvest in new projects which have an expected return of 15.7% per year. Suppose RFK will maintain the same dividend payout rate, retention rate and return on new investments in the future and will not change its number of outstanding shares. a. What growth rate of earnings would you forecast for RFK? b. If RFK&#39;s equity cost of capital is 12.7%,

what price would you estimate for RFK shares? c. Suppose instead that RFK paid a dividend of \$3.80 per share this year and retained only \$1.02 per share in earnings. That is, it chose to pay a higher dividend instead of reinvesting in as many new projects. If RFK maintains this higher payout rate in the future, what share price would you estimate for the firm now? Should RFK follow this new policy?

a. RFK&#39;s growth rate of earnings is %. (Round to one decimal place.) b. If RFK&#39;s equity cost of capital is 12.7%, then RFK&#39;s share price will be \$ . (Round to the nearest cent.) c. If RFK paid a dividend of \$3.80 per share this year and retained only \$1.02 per share in earnings, then RFK&#39;s share price would be \$ . (Round to the nearest cent.) Should RFK follow this new policy? (Select the best choice below.)

O A. No, RFK should not raise dividends because companies should always reinvest as much as possible. OB. Yes, RFK should raise dividends because the return on new investments is lower than the cost of capital. O C. No, RFK should not raise dividends because the projects are positive NPV.

Jan 31 2020 View more View Less