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A company is expect to pay annual dividends of $10.00 per share in perpetuity on the 1 million shares outstanding. Shareholders require a 10% rate of return on the stock.

(a) What is the price of the stock?

(b) What is the aggregate market value of the equity?

The company decides to increase its dividend next year to $20.00 per share without changing its investment or borrowing plans. Thereafter, the company will revert to its policy of distributing $10 million in dividends per year. Only the existing shareholders receive the $20.00 dividend. The new shareholders do not receive the $20.00 per share dividend, but will receive the dividends paid thereafter along with the existing shareholders.

(d) What is the total present value of the dividends paid on the new shares?

(e) What is the value of the transfer of ownership from the old shareholders to the new shareholders?

(f) Did the old shareholders gain or lose total value?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92839735

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