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Rubenstein Bros Clothing Is Expecting To Pay An Annual Dividend

Rubenstein Bros. Clothing is expected to pay an annual dividend of $0.75 per share out of its $2.25 in annual earnings per share. The stock currently sells for $12.50 per share. The firm has $10 million in assets, with 40% funded by debt. It has historically earned an 18% return on equity, which is expected to continue.

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Amit Pandey
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383 views1 page

Rubenstein Bros Clothing Is Expecting To Pay An Annual Dividend

Rubenstein Bros. Clothing is expected to pay an annual dividend of $0.75 per share out of its $2.25 in annual earnings per share. The stock currently sells for $12.50 per share. The firm has $10 million in assets, with 40% funded by debt. It has historically earned an 18% return on equity, which is expected to continue.

Uploaded by

Amit Pandey
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Solved: Rubenstein Bros Clothing is expecting to pay an

annual dividend

Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $0.75 out of
annual earnings per share of $2.25. Currently, Rubenstein Bros.’ stock is selling for $12.50 per
share. Adhering to the company’s target capital structure, the firm has $10 million in assets, of
which 40% is funded by debt. Assume that the firm’s book value of equity equals its market
value. In past years, the firm has earned a return on equity (ROE) of 18%, which is expected to
continue this year and into the foreseeable future.
a. Based on that information, what long-run growth rate can the firm be expected to maintain?
b. What is the stock’s required return?
c. If the firm changed its dividend policy and paid an annual dividend of $1.50 per share,
financial analysts would predict that the change in policy will have no effect on the firm’s stock
price or ROE. Therefore, what must be the firm’s new expected long-run growth rate and
required return?
d. Suppose instead that the firm has decided to proceed with its original plan of disbursing
$0.75 per share to shareholders but the firm intends to do so in the form of a stock dividend
rather than a cash dividend. The firm will allot new shares based on the current stock price of
$12.50. In other words, for every $12.50 in dividends due to shareholders, a share of stock will
be issued. How large will the stock dividend be relative to the firm’s current market
capitalization?
e. If the plan in Part d is implemented, how many new shares of stock will be issued and by how
much will the company’s earnings per share be diluted?

Rubenstein Bros Clothing is expecting to pay an annual dividend

ANSWER
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