Dividend Policy. The Quick Buck Company is an all-equity firm that has been in existence for the past three years. Company management expects that the company will last for two more years and then be dissolved. The firm will generate cash flows of $550,000 next year and $840,000 in two years, including the proceeds from the liquidation. There are 20,000 shares of stock outstanding and shareholders require a return of 12 percent.
a. What is the current price per share of the stock?
b. The board of directors is dissatisfied with the current dividend policy and proposes that a dividend of $650,000 be paid next year. To raise the cash necessary for the increased dividend, the company will sell new shares of stock. How many shares of stock must be sold? What is the new price per share of the existing shares of stock?
a)
To determine: The current price per share of the stock.
Introduction:
Dividend policy:
Dividend policy is the framework which helps the company to take decisions on the distribution of earnings to their shareholders.
Answer to Problem 13QP
The current price per share of the stock is $58.04.
Explanation of Solution
Given information:
QB Company expects they will have $550,000 cash for the next year and $840,000 in two years. There are 20,000 shares of stock outstanding. The required rate of return by the shareholders is 12%.
Formulae:
The formula to calculate the dividend per share:
The formula to calculate the stock price:
Compute the dividend per share:
For one year:
Hence, the dividend per share is $27.50.
For the next two years:
Hence, the dividend per share for two years is $42.
Compute the stock price:
Hence, the current price per share of the stock is $58.04.
b)
To determine: The number of shares to sell.
Answer to Problem 13QP
The number of shares to sell is 1,723.08.
Explanation of Solution
Given information:
The proposed dividend is $650,000.
Formulae:
The formula to calculate the increased dividend:
The formula to calculate the new number of shares to sell:
Compute the dividend increase:
Hence, increase in dividend is $100,000.
Compute the new number of shares to sell:
Hence, the new number of shares to sell is 1,723.08.
To determine: The new price per share of the existing shares of stocks.
Answer to Problem 13QP
The new price per share of the existing shares of stocks is $58.04.
Explanation of Solution
Compute the new price per share of the existing shares of stocks:
Note: The investment in the first year is $100,000 and investment in the next two years will be at the rate 12%.
The formula to calculate the dividend to new shareholders:
Compute the dividend to new shareholders:
Hence, the dividends to new shareholders are $112,000.
This is because the dividends are paid to new shareholders; this will reduce the amount available to the current shareholders.
Compute the amount available to the current shareholders:
Hence, the dividends available to the current shareholders are $728,000.
Compute the new price per share of the existing shares of stock:
For one year:
Hence, the dividend per share is $32.50.
For the next two years:
Hence, the dividend per share for two years is $36.40.
Compute the new stock price:
The formula to calculate the new stock price:
Hence, the current price per share of the stock is $58.04.
Thus, the original dividend policy’s price is the same as the above.
Want to see more full solutions like this?
Chapter 14 Solutions
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
- Payout Policy. House of Haddock has 5,000 shares outstanding and the stock price is $100. The company is expected to pay a dividend of $20 per share next year, and thereafter, the dividend is expected to grow indefinitely by 5% a year. The president, George Mullet, now makes a surprise announcement: He says that the company will henceforth distribute half the cash in the form of dividends and the remainder will be used to repurchase stock. a. what should be the total value of the company before the announcement? b. what should be the total value after the announcement? c. what must be the expected rate of return on equity? d. what is the new growth rate in the dividend stream? (check your estimate of share value by discounting this stream of dividends per share)arrow_forwardConsolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 2.7 million shares that are outstanding. Shareholders required a 10 % rate of return on consolidated stock. A. What is the price of Consolidated stock? B. What is the total market value of its equity? Consolidated now decides to increase next year’s dividends to $20 a share, without changing its investment or borrowing plans. Thereafter, the company will revert to its policy of distributing $10 per year. C. How much new equity capital will the company need to raise to finance the extra dividend payment (enter answer in millions). D. What will be the total present value of dividends paid each year on the new shares that the company will need to issue (answer in millions)? E. what will be the transfer of value from old shareholder to new shareholder (answer in million)?arrow_forwardYour company follows the policy to pay all the free cashflow to equityholders via dividend. The free cashflow next year will be 6,000,000 USD and there are 2,000,000 shares outstanding. The dividend is expected to increase at a 5% rate. The company thinks to issue new equity for 4,000,000 USD at the end of the year to increase the amount paid out as dividend (note: the new shareholders will also receive the dividend). The levered return on equity is 16%. a) What will be the dividend paid next year?b) What will be the ex-dividend price next year?arrow_forward
- Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 2.7 million shares that are outstanding. Shareholders require a 10% rate of return from Consolidated stock. a. What is the price of Consolidated stock? (Do not round intermediate calculations.) b. What is the total market value of its equity? (Enter your answer in millions.) Consolidated now decides to increase next year’s dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year. c. How much new equity capital will the company need to raise to finance the extra dividend payment? (Enter your answer in millions.) d. What will be the total present value of dividends paid each year on the new shares that the company will need to issue? (Enter your answer in millions.) e. What will be the transfer of value from the old shareholders to the new shareholders?…arrow_forwardCompany A distributed a dividend of $ 4 per share last year. If the company is expected to distribute the same amount of dividends in the following years and the least profitability rate investors expect is 10%, what is the real value of the shares of company A? If the stock of this company is currently trading at 30 USD, can the relevant stock be purchased?a) 45 and must be purchasedb) 70.83 and must be purchasedc) 70.83 and should not be boughtd) 40 and should not be bought e) 40 and must be purchased ===================== How much money will be accumulated at the end of the 2nd year in our account where we deposit 700 USD at the beginning of each year with 9% interest?a) 4599,67b) 2750,25c) 1594,67d) 4200,25e) 5381,25 -------------------- How many USD should a person who constantly wants to receive 4500 USD at the end of each year invest in a bank that pays 12.5% interest today?a) 24000b) 40000 c) 10000d) 36000e) 28000arrow_forwardORcell Co. has the following dividend policy. Next year, the company will pay a dividend of $3. In year 2 the company will pay a dividend of $2.75. After year 2, the company expects to decrease its dividend at a constant rate of 3% per year indefinitely. If the return required by share holders is 13%, what is the price of the stock today? answer must be 17.86arrow_forward
- Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 1.2 million shares that are outstanding. Shareholders require a 8% rate of return from Consolidated stock. a. What is the price of Consolidated stock? (Do not round intermediate calculations.) b. What is the total market value of its equity? (Enter your answer in millions.) Consolidated now decides to increase next year’s dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year. c. How much new equity capital will the company need to raise to finance the extra dividend payment? (Enter your answer in millions.)arrow_forward9. a. Doldrums Plastics has been paying a $3 dividend each year for two years andcompany reports indicate that management intends to continue this dividendpayment for the foreseeable future. The market determined required rate ofreturn on Doldrums's common stock is 15 percent, what will be the price of a shareof stock? b. Suppose that an aggressive new Chief Executive Officer, Dee Uamoca, is hired byDoldrums. Because of the productive policies and processes instituted byUamoca, capital market investors anticipate that Doldrums's earnings anddividends will increase at a constant 8 percent rate beginning immediately. Whatwould be the price of a share of Doldrums common stock if the required rate ofreturn remains at 15 percent?arrow_forwardA Corporation will pay a dividend of $2.85 per share next year. The company pledges to increase its dividend by 9.1 percent per year, indefinitely. If you require a return of 21 percent on your investment, how much will you pay for the company's stock today? Select one: a.$23.95 b.$38.12 c.$23.38 d.$38.89arrow_forward
- The dividend discount model assumes the value of a share of common stock is the present value of all future dividends. One year holding period Assume an investor wants to buy a stock, hold it for one year, and then sell it. The company earned $2.50 a share last year and paid a dividend of $1 a share. The company maintains a 40% payout ratio over time. Financial analysts suggest the firm will earn about $2.75 per share during the coming year and will raise its dividend to $1.10 per share. The risk free rate is 10% and the market risk premium is currently 4%. You project the sale price of this stock a year from now to be $22. ? Estimate the value of this stock. ? Would you buy this stock? Multiple holding period Assume the expected holding period is three years and you estimate the following dividend payments at the end of each year. Year 1 - $1.10 per share The Business School BUACC3701: Financial Management Year 2 - $1.20 per share Year 3 - $1/35 per share The risk free rate is 10% and…arrow_forwardAttempts Keep the Highest/2 7. The cost of new common stock represent the fees that firms pay to investment bankers to help them issue new common stock. Sunny Day Manufacturing Company has a current stock price of $22.35 per share, and is expected to pay a per-share dividend of $2.45 at the end of next year. The company's earnings and dividends' growth rate are expected to grow at the constant rate of 8.70% into the foreseeable future. If Sunny Day expects to incur flotation costs of 5.00% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be Grade It Now Save & Continue Continue without savingarrow_forwardXtinct Artifacts has not paid a dividend during the past 10 years. However, at the end of this year, the company plans to pay a $1.50 dividend and a $2 dividend the following year (Year 2). Starting in three years, the dividend will begin to grow by 5 percent each year for as long as the firm is in business. If investors require an 11 percent rate of return to purchase Xtinct’s common stock, what should be the market value of its stock today? please help with the forarrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT