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Rump Electric Power Ltd - Case Study - Management Assignment Help

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Rump Electric Power Ltd expects to earn $20 per share this year and intends to pay out $8 per share in dividends to shareholders and retain $12 per share to invest in new projects with an expected return on equity of 20%. In the future, Rump Electric Power Ltd expects to retain the same dividend payout ratio, expects to earn 20% return on its equity invested in new projects, and will not be changing the number of ordinary shares outstanding.
 

Required:
(a) Calculate the future growth rate for Rump Electric Power Ltd’s earnings.
(b) If the investor’s required rate of return for Rump Electric Power Ltd’s shares is 15%, what would be the price of its ordinary shares?
(c) What would happen to the price of Rump Electric Power Ltd’s ordinary shares if it raised its dividends to $12 per share this year and then continued with that same dividend payout ratio permanently? Should Rump Electric Power Ltd make this change? (Assume that the investor’s required rate of return remains at 15%.)
(d) What would happen to the price of Rump Electric Power Ltd’s ordinary shares if it lowered its dividends to $4 this year and then continued with that same dividend payout ratio permanently?
(e) Does the constant dividend growth rate model work in this case? Explain why or why not? (Assume the investor’s required rate of return remains at 15% and that all future new projects will earn 20%.)

 

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