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Red Rhino’s has no intention of buying back stock or issuing new shares in the future. It pays annual dividends. You expect the dividend next year to be $2.53 per share. The stock is currently trading at a price of $43.07 per share. Based on risk, it’s fair discount rate, E(r), is expected to be 9.8% when measured as an EAR. You expect that its ROE next year will be 7%. You also expect it to payout 35% of next year’s earnings in the form of dividends. Determine the expected long-term growth rate of dividends for the firm. If there is insufficient data to answer the question, then answer 99.99. Provide an answer, as a percentage

B) TwoByFour Inc. currently has an ROE of 10.88%. You expect this level of ROE to persist for at least the next five years. Thereafter, you expect the ROE to remain positive, but to generally trend downward for a decade or so, (as competing firms enter the industry) – and then level off.

The firm currently pays annual dividends. You expect the next dividend to be $2.59 per share, payable one year from today. Based on risk, you’ve estimated the stock’s fair discount rate to be 6.93% per year, when measured as an EAR. You expect that the fair discount rate will apply forever.

At present, the firm utilizes a Payout Ratio of 34.7% per year, and management indicates that they intend to apply the same Payout Ratio in the next three years.

You have been hired as a consultant to advise the firm’s CEO and CFO on the best dividend policy to utilize for the next three years.

Ignoring signaling, of the five choices below, what is your best recommendation?

(1) Increase the current Payout Ratio to 100%.

(2) Decrease the current Payout Ratio to 0%.

(3) Keep the current Payout Ratio at its current level.

(4) It’s not possible to determine the best dividend policy – given the limited information.

(5) None of the above.

Enter an answer from 1 to 5, based on your best recomendation.


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