In: Accounting
The current (year 0) price of the shares of Company XYZ is
$50. There are 1...
- The current (year 0) price of the shares of Company XYZ is
$50. There are 1 million shares
outstanding. Next year (year 1)’s dividend per share is $2, which
represents a 60% payout from earnings (net income). Investors
expect a ROE of 20%, and a constant growth. (12 points)
- What will be the dividend per share in year 2 and year 3? (2
points)
- What is the current market value of the firm? (1 point)
- What will be the value of the firm next year after the payout?
(2 points)
Suppose that the company announces
that it will increase its dividend from $2 per share to $4 per
share next year (year 1), and that the extra cash needed will be
financed by issuing new shares. However, total dividends after next
year follow the old schedule.
- What will be the price of the new shares that the firm issue in
year 1? How many new shares will be issued? (2 points)
- How much dividend will the old shareholders get in year 2? (2
points)
- Calculate the old shareholder’s present value (today) of
discounted future dividends, under the new policy. What should be
the current stock price under the new policy? (2 points)
- Comment on the important assumptions made in this calculation.
How would your answer to f) change if the assumptions are changed?
(1 points)
Looking for answers e, f, g