Surf & Turf Hotels is a mature business, although it pays no cash dividends. Next yearAc€?cs earnings are forecasted at $56 million. There are 10 million outstanding shares. The company has traditionally paid out 50% of earnings by repurchases and reinvested the remaining earnings. With reinvestment, the company has generated steady growth averaging 5% per year. Assume the cost of equity is 12%.
a.
Calculate Surf & Turf Ac€?cs current stock price, using the constant-growth DCF model. (Hint: Take the easy route and value overall market capitalization.) (Do not round intermediate calculations. Round your answer to the nearest whole number.)
Current stock price $ per share
b.
Now Surf & Turf Ac€??s CFO announces a switch from repurchases to a regular cash dividend. Next yearAc€?cs dividend will be $2.80 per share. The CFO reassures investors that the company will continue to pay out 50% of earnings and reinvest 50%. All future payouts will come as dividends, however. What would you expect to happen to Surf & Turf Ac€?cs stock price? (Do not round intermediate calculations. Round your answer to the nearest whole number.)