Surf & Turf Hotels is a mature business, although it pays no cash dividends. Next year’s earnings are forecast at $78 million. There are 10 million outstanding shares. The company has traditionally used 60% of earnings to repurchase shares of stock and has reinvested the remaining earnings. With reinvestment, the company has generated steady growth averaging 4% per year. Assume the cost of equity is 9%.
a. Calculate Surf & Turf’s current stock price. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Answer is complete but not entirely correct.
Stock price $ 62.40 X per share
b. Now Surf & Turf’s CFO announces a switch from repurchases to a regular cash dividend. Next year’s dividend will be $4.70 per share. The CFO reassures investors that the company will continue to pay out 60% of earnings and reinvest 40%. All future payouts will come as dividends, however. What would you expect to happen to Surf & Turf’s stock price? Ignore taxes.
Answer is complete and correct.
The price will increase