The net income of Novis Corporation, which has 10,000 outstanding shares and a 1

Question

The net income of Novis Corporation, which has 10,000 outstanding shares and a 100% payout policy, is $32,000 today. The expected value of the firm in one year is $1,545,600. The appropriate discount rate for Novis is 12%. Assume that the tax rate is zero and that there are no issuance costs

.a) What is the current value of the firm?

b) What are the cum-dividend and the ex-dividend prices of Novis’ stock if the board follows its current dividend policy?

At the dividend declaration meeting, several board members claimed that the dividend is too meager and is probably depressing Novis’ stock price. They propose that Novis sell enough new shares to finance a $4.25 per share dividend. Assume that the new shareholders are not entitled to this dividend (i.e., assume that their shares are issued ex-dividend).

c) If the proposal is adopted, at what price will the new shares sell and how many will be sold?

d) Comment on the claim that the low dividend is depressing the stock price.

Explanation / Answer

Net Income                32,000 Shares outstanding                10,000 Eraning per share                     3.20 payout ratio 100% Expected value of firm    1,545,600.00 Discount rate 12% PV of dis factor                  0.893 current value of firm    1,380,220.80 Cum Price of stock                138.02 Ex price of stock                134.82 dividend per share tobe declared                     4.25 new share price                133.77 if the company maintains a 100% payout ratio then the stock price of the company would decline in the long run as there is no addition to the shareholders equity value

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