sunnyfax publishing pays out all its earnings and has a share price of $37. in order to expand, sunnyfax publishing decides to cut its dividend from $3.00 to $2.00 per share and reinvest the retained funds. once the funds are reinvested, they are expected to grow at a rate of 13%. if the reinvestment does not affect sunnyfax's equity cost of capital and earnings before the dividend cut were expected to be constant, what is the expected share price as a consequence of this decision?

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06-12-2022
Business

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sunnyfax publishing pays out all its earnings and has a share price of $37. in order to expand, sunnyfax publishing decides to cut its dividend from $3.00 to $2.00 per share and reinvest the retained funds. once the funds are reinvested, they are expected to grow at a rate of 13%. if the reinvestment does not affect sunnyfax's equity cost of capital and earnings before the dividend cut were expected to be constant, what is the expected share price as a consequence of this decision?

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aamirmajeed5100 aamirmajeed5100 · Answer 1 · 2022-12-08T12:42:42-05:00

The expected share price as a consequence of this decision is $162.43

The current share price of a company is determined by the supply and demand of the stock on the stock market where it is listed. The market price is influenced by factors such as the company's performance, economic conditions, industry trends, and news related to the company.

Calculate the retained earnings using the dividend cut.

Retained earnings = Dividend per share x Number of outstanding shares

Retained earnings = $3.00 x 37 = $111

Calculate the reinvestment amount.

Reinvestment amount = Retained earnings x (1 + Growth rate)

Reinvestment amount = $111 x (1 + 13%) = $125.43

Calculate the new share price.

New share price = Reinvestment amount + Existing equity cost of capital

New share price = $125.43 + $37 = $162.43

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