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

question 17

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 do 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) $57.38
• D) $61.38

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Definitions:

Specified Future Date

A particular date identified in the future on which certain events are anticipated or specific actions are expected to occur, often used in contracts or agreements.

Paid-In Capital Accounts

Funds raised by a company through the sale of equity or stock, representing the capital contributed by investors in exchange for shares.

Carrying Value

The value of an asset listed in a company's financial records, determined by subtracting its accumulated depreciation from its initial purchase price.

Common Stock

Common stock represents ownership shares in a corporation, entitling holders to vote on corporate matters and potentially receive dividends.