Kirkevue Industries pays out all its earnings as dividends and has a share price of $27. In order to expand, Kirkevue announces it will cut its dividend payments from $2.15 to $1.75 per share and reinvest the retained funds. What is the growth rate that should be achieved on the reinvested funds to keep the equity cost of capital unchanged?

Question

Quizplus · Accepted Answer

The correct answer is A.The growth rate that should be achieved on the reinvested funds to keep the equity cost of capital unchanged can be calculated using the following formula:g = (D1 / P0) - (D0 / P0)where:g = growth rateD1 = new dividend per shareP0 = current share priceD0 = old dividend per shareIn this case, we have:D1 = $1.75P0 = $27D0 = $2.15Plugging these values into the formula, we get:g = ($1.75 / $27) - ($2.15 / $27)g = 0.0148g = 1.48%Therefore, the growth rate that should be achieved on the reinvested funds to keep the equity cost of capital unchanged is 1.48%.

Kirkevue Industries Pays Out All Its Earnings as Dividends and Has