Use the Following Information to Answer the Question(s)below

question 52

Multiple Choice

Use the following information to answer the question(s) below.
Wyatt Oil,an all-equity financed firm,has just reported EPS of $4.00 per share.Despite an economic downturn,Wyatt is confident regarding its current investment opportunities,but due to the current financial crisis,Wyatt does not wish to fund these investments externally.Wyatt's board has therefore decided to suspend its stock repurchase plan and cut its dividend to $1 per share (from its current level of $2 per share) and retain these funds instead.The firm just paid its current dividend of $1.00 per share and expects to keep its dividend at $1 per share next year as well.In subsequent years,it expects its growth opportunities to slow,and it will still be able to fund its growth internally with a target 40% dividend payout ratio,and reinitiating its stock repurchase plan for a total payout rate of 60%.All dividends and repurchases occur at the end of each year.
Wyatt's existing operations are expected to generate the current level of earnings per share in the future.Assume that the return on new investments is 16% and that reinvestments will account for all future earnings growth.Wyatt's current equity cost of capital is 12%.
-Wyatt's expected EPS in two years is closest to:

• A)$4.48.
• B)$4.64.
• C)$5.04.
• D)$5.38.

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Definitions:

Original Investment

The initial amount of money used to purchase an asset, start a business venture, or invest in a financial instrument.

Operating Business

An active entity engaged in commercial, industrial, or professional activities to generate profit.

Gross Profit

Gross Profit is the financial gain obtained after deducting the cost of goods sold from the total revenue, indicating the efficiency of a company's core business activities.

Net Profit

The amount of money that remains from revenues after all operating expenses, taxes, and interest have been subtracted.