Question

ABC Corp has invested in projects with an ROE of 15% and expects an EPS of $5 next year. The company maintains a 60% dividend ratio and the share price is currently $50. After a high-level meeting, the company decides to change its dividend policy and invest in new projects with an ROE of 40%. As a result of implementing these decisions, the company's share price jumps to $100. Assuming that there has been no change in the EPS and the rate of return expected by investors remains the same, what is the new dividend ratio?

          ABC Corp has invested in projects with an ROE of 15% and expects an EPS of $5 next year. The company maintains a 60% dividend ratio and the share price is currently $50. After a high-level meeting, the company decides to change its dividend policy and invest in new projects with an ROE of 40%. As a result of implementing these decisions, the company's share price jumps to $100. Assuming that there has been no change in the EPS and the rate of return expected by investors remains the same, what is the new dividend ratio?

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Added by Garrett B.

Horngren’s Cost Accounting

Srikant M. Datar, Madhav V. Rajan 16th Edition

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Solved by Expert Akash M

08/02/2023

Step 1

So, the initial DPS is $3. The initial price of the share is $50, so the initial dividend yield (DY) is DPS divided by the price, which is $3/$50 = 6%. Now, the company decides to invest in new projects with an ROE of 40%. This means that the company is Show more…

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ABC Corp has invested in projects with an ROE of 15% and expects an EPS of $5 next year. The company maintains a 60% dividend ratio and the share price is currently $50. After a high-level meeting, the company decides to change its dividend policy and invest in new projects with an ROE of 40%. As a result of implementing these decisions, the company's share price jumps to $100. Assuming that there has been no change in the EPS and the rate of return expected by investors remains the same, what is the new dividend ratio?

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