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You have been watching XYZ Corp. as a possible investment.

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You have been watching XYZ Corp. as a possible investment. You are convinced that XYZ?s long run target payout is approximately 60% of its long run earnings. You also noticed that the firm tends to follow Lintner?s ?partial adjustment dividend model?, and that the partial adjustment coefficient tends to be about 30%. Last year it paid out $0.60on earnings of $1.20. The firm announces that it will pay $0.60 on earnings of $1.25 for the current year.;(a) What is your guess regarding management?s perception of the firm?s long-run earnings (rounded to the nearest cent)?;(b) What do you think would happen to the stock price if the firm, instead of paying the dividend per share of $0.60, the firm announced a repurchase of shares through open market purchases of approximately the same aggregate amount?;(c) The following year, the firm announces an annual dividend of $.61 on earnings of $1.10. What is your revised estimate of long run earnings?

 

Paper#21129 | Written in 18-Jul-2015

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