The Quick Buck Company is an all-equity firm that has been in existence for the

Question

The Quick Buck Company is an all-equity firm that has been in existence for the past three years. Company management expects that the company will last for two more years and then be dissolved. The firm will generate cash flows of $740,000 next year and $1,160,000 in two years, including the proceeds from the liquidation. There are 32,000 shares of stock outstanding and shareholders require a return of 14 percent.

What is the current price per share of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

The Board of Directors is dissatisfied with the current dividend policy and proposes that a dividend of $850,000 be paid next year. To raise the cash necessary for the increased dividend, the company will sell new shares of stock.

How many shares of stock must be sold? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

What is the new price per share of the existing shares of stock?(Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

The Quick Buck Company is an all-equity firm that has been in existence for the past three years. Company management expects that the company will last for two more years and then be dissolved. The firm will generate cash flows of $740,000 next year and $1,160,000 in two years, including the proceeds from the liquidation. There are 32,000 shares of stock outstanding and shareholders require a return of 14 percent.

Explanation / Answer

(a)We use the discounted method to find the share price

The Discounted cash flow = 740,000/1.14 + 1,160,000/1.14^2 = 1,541,705.14

Hence share price = 1,541,705.14/32,000 = 48.17828

Share price = $48.18 (Rounded to 2 decimals)

(b) The number of shares to be sold are : 850,000/48.17828 = 17,642.80

(c) Total number of shares now are 32,000 + 17,643 (Since fractional shares are not possible) = 49,643

The new share price will be 1,541,705.14/49,643 = 31.0558 = $31.06

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