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

question 11

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 current stock price is closest to:

• A)$51.23.
• B)$54.00.
• C)$49.11.
• D)$61.38.

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Definitions:

Accrual Basis

An accounting method that recognizes revenue when earned and expenses when incurred, regardless of when cash is exchanged.

Wages Expense

The cost incurred by a company for the work performed by its employees, reflected in its financial statements.

Wages Payable

An account that shows the total amount of wages earned by employees that the company has not yet paid.

Accounting System

A methodical procedure of accurately and timely recording and organizing financial transactions and information.