Question

7. Gibson Co. has a current-period cash flow of $1.2 million and pays no dividends. The PV of the company’s future cash flows is $20 million. The company is entirely financed with equity and has 800,000 shares outstanding. Assume the dividend tax rate is zero. a. What is the share price of the Gibson stock? b. Suppose the board of directors of Gibson Co. announces its plan to pay out 50 percent of its current cash flow as cash dividends to its shareholders. How can Jeff Miller, who owns 1,500 shares of Gibson stock, achieve a zero payout policy on his own, by buying or selling shares. How many shares should he sell or buy?

Answer 1

A. Expected price is the PV of future cashflows. Since the $1.2 million is current period, and the $20 million is already PV, we don't have to discount. Therefore, price per share is total dollars scaled by total shares.

Price = = $26.5

Share price of the gibson stock is $26.5 .

B. Dividend he will get = $1.2 million x 50% x 1,000 / 800,000= $750

Expected share price after dividend = 0.6+20/0.8 = $33.5

Number of shares that Jeff needs to buy = 750/33.5 = 22