- 10 Marks
FM – L2 – Q33 – Dividend policy
Suggest share price for Kumasi Transport PLC based on 25% dividend payout using dividend growth model.
Question
he directors of an all-equity company are considering the company’s policy on dividends and retentions. The cost of capital is 9% and the company is able to invest in new capital projects that will earn this return. The company’s shares are quoted and traded on a major stock market.
In the year just ended, the earnings per share were GH¢2.00 per share. The company pays a dividend annually, and is about to pay a dividend for the year just ended on the basis of its selected dividend and retentions policy.
Required:
Suggest what the company’s share price might be if the directors select a policy of paying annual dividends that are equal to:
(a) 25% of earnings
(b) 50% of earnings
(c) 70% of earnings
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