The firm you are CEO if has a current period cash flow of 2.1 million and pays n

Question

The firm you are CEO if has a current period cash flow of 2.1 million and pays no dividend. The present value of the company’s future cash flows is $17.5 million. The company is entirely financed with equity and there are 500,000 shares outstanding. Assume the dividend tax rate is zero.

                What is the share price of your firm?

Suppose you and the board announce a plan to pay out 50 percent of the current cash flows as a dividend to its shareholders. How can a shareholder, who owns 1000 shares, achieve a zero pay-out policy on their own?

Explanation / Answer

Answer:Share price = $39.20, purchase 56.60 shares

The current price is the current cash flow of the company plus the present value of the expected cash flows, divided by the number of shares outstanding. So, the current stock price is:

Stock price = ($2,100,000 + 17,500,000) / 500,000

Stock price = $39.2

b. He can invest the dividends into the stock.

Dividends that he gets =$2.1 million x 50% x 1,000/ 500,000= $2100

Expected share price after dividend =2.1+ 35 /1 =$37.1

Number of shares that Jeff needs to buy = 2100 /37.1 = 56.60

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.