Question: Dividend Displacement and Value (Medium) Two firms, A and B, which have very similar operations, have the same book value of $100 at the end of 2012 and their cost of capital is 11 percent. Both are forecast to have earnings of $16.60 in 2013. Firm A, which has 60 percent dividend payout, is forecast to have earnings of$17.80 in 2014. Firm B has zero payout.
a. What is your best estimate of firm B earnings for 2014?
b. Would you pay more, less, or the same for firm B relative to firm A in 2012?