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Should the firm increase or decrease their payout ratio

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Reference no: EM132481233

1. David is getting nervous about his stock holding in ABC He bought the stock 12 years ago at $10 per share and the price is now $105.50 per share. ABC has a policy of paying out 60 percent of its earnings in dividends and David expects the company to continue earning a 10 percent return on equity (ROE). Over the past 12 months, ABC paid $3.00 in dividends. Assume the discount rate for ABC is 15%.

1 Based on David's projections, is the stock overpriced at $105.50 per share?

2 Assume David's projections are correct. Should the firm increase or decrease their payout ratio? Explain your answer.

Reference no: EM132481233

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