1. You have invested 500 shares in Maxwell's Company Limited. For the next three years you will receive dividends of $2.50 per share in year one, $2.75 per share in year two and a liquidating dividend of $25.00 in year three. Assume Maxwell Ltd has a required rate of return is 12 percent and dividend is an annuity.
a) What is the price of Maxwell's stock today?
b) You wish to maintain an equal dividend cash flow through the three year period, how would you accomplish this using the concept of homemade dividend.
2. Martha Stewart's expected net income for next year is $2.5 million. The company target and current structures are 40 percent debt and 60 percent common equity. The optimal capital budget for next year is $1.75million.
a) What is the expected payout ratio if Martha Stewart's uses the residual distribution model to determine next year's distribution and makes all distributions in the form of dividends?
b) Why would paying cash dividend be a better way for a firm to repurchase stock?