Question

The net income of Novis Corporation is $84,000. The company has 25,000 outstanding shares and a 100 percent payout policy. The expected value of the firm one year from now is $1,750,000. The appropriate discount rate for the company is 12 percent, and the dividend tax rate is zero.

    

a.	What is the current value of the firm assuming the current dividend has not yet been paid? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

      

Current value of the firm

$

  

b.	What is the ex-dividend price of the company’s stock if the board follows its current policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

      

Ex-dividend price

$

   

c.	At the dividend declaration meeting, several board members claimed that the dividend is too meager and is probably depressing the company’s price. They proposed that the company sell enough new shares to finance a $4.56 dividend.

    

c-1.	Calculate the current value of the firm under the proposed policy. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

    

Current value of the firm

$

    

c-2.	If the proposal is adopted, at what price will the new shares sell? How many will be sold? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. The number of shares does not have to be integer.)

    

Current share price	$
Shares sold

Answer 1

a) current value of firm = net income + present value of the value of firm one year from now

= 84000 + (1,750,000/(1.12)) = 84000 + 1,562,500 = 1,646,500

b)

value of the firm (ex-dividend) = current value of firm - net income = 1,646,500 - 84000 = 1,562,500

ex-dividend price = value of the firm (ex-dividend)/no. of shares outstanding = 1,562,500/25000 = $62.5

c-1)

suggested dividend per share = $4.56

total value of dividend, T = suggested dividend per share * no. of shares outstanding = 4.56*25000 = 114,000

sale of shares for new dividend = T - net income = 114,000 - 84000 = 30,000

amount to be received by new shareholders aftre 1 year , A = sale of shares* (1+cost of capital) = 30,000*(1.12) = 33,600

total value of firm = Total value of dividend + (( expected value of firm 1 year from now - A)/1.12) = 114,000 + ((1,750,000 - 33600)/1.12) = 114,000 + 1,532,500 = 1,646,500

c-2)

current share price = (total value of firm calculated in c-1 - A)/ no. of shares outstanding = (1,646,500 - 114,000)/25000 = $61.3

No. of new shares sold = new shares sold/ current share price = 30,000/61.3 = 489.3964 or 489.40 ( after rounding off)