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Compute the price of the stock under the two plans

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Question - The Vinson Corporation has earnings of $500,000 with 250,000 shares outstanding. Its PIE ratio is 20. The firm is holding $300,000 of funds to invest or pay out in dividends. If the funds are retained, the after tax return on Investment will be 18 percent, and this will add to present earnings. The 18 percent is the normal return anticipated for the corporation and the PIE ratio would remain unchanged. If the funds are paid out in the form of dividends the PIE ratio will increase by 10 percent because the shareholders in this corporation have a preference for dividends over retained earnings.

Required -

a. Compute the price of the stock under the two plans.

b. Which plan will maximize the market value of the stock?

Reference no: EM133157788

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