Kodak used to primarily produce and distribute photographic paper and developing materials for traditional (i.e., non digital) photographic methods. A sizable portion of their business was home photography. Since they were one of the few suppliers of such materials, as the population grew, so did the demand for their product. Consider the value of Kodak in 1970. At that time, the investment capital per share (ICPS) for Kodak was $20. Given their market power, their return on investment was 15%. During that time, the required rate of return on Kodak was .14. In 1970, the policy of Kodak was to plowback 25 percent of its earnings per share.
1. For simplicity, assume that Kodak pays a dividend once a year. The next dividend payment will be exactly one year from now. Given Kodak’s plowback policy, what was the dividend paid in 1971? Assume that it took all of 1970 to generate the earnings off of Kodak’s $20.00 ICPS and that the reinvesting and paying of dividends occurred right at the beginning of 1971.
2. Given Kodak’s plowback policy, what was the growth rate in the dividends payments through time?