The Warner Corporation

The Warner Corporation has earnings of $750,000 with 300,000 shares outstanding. Its P/E ratio is 16. 
The firm is holding $400,000 of funds to invest or pay out in dividends. If the funds are retained, 
the aftertax return on investment will be 15 percent, and this will add to present earnings. The 15 
percent is the normal return anticipated for the corporation, and the P/E ratio would remain unchanged.
If the funds are paid out in the form of dividends, the P/E ratio will increase by 10 percent because 
the stockholders in this corporation have a preference for dividends over retained earnings.
Which plan will maximize the market value of the stock?
Solution
Problem 18-15
Instructions

Enter formulas to complete the requirements of this problem.

Information
Return on investment 15%
Funds to invest or pay out $400,000 
Earnings $750,000 
Shares outstanding 300,000 
P/E 16 

Retained Earnings
Incremental earnings FORMULA
Earnings per share FORMULA
Price of stock FORMULA

Payout Earnings
New P/E FORMULA 
Earnings per share FORMULA
Price of stock FORMULA

Which plan will maximize the market value of the stock?