Question

Caspian Sea Drinks needs to raise $94.00 million by issuing additional shares of stock. If the market estimates CSD will pay a dividend of $1.29 next year, which will grow at 3.80% forever and the cost of equity to be 13.25%, then how many shares of stock must CSD sell?

Answer format: Number: Round to: 0 decimal places.

Answer 1

Step-1, The Price of the stock today

Here, we have Dividend per share in Year 1 (D1) = $1.29 per share

Dividend Growth Rate (g) = 3.80% per year

Required Rate of Return (Ke) = 13.25%

Therefore, the Price of the stock (P0) = D1 / (Ke – g)

= $1.29 / (0.1325 – 0.0380)

= $1.29 / 0.0945

= $13.65 per share

Step-2, The number of shares of stock to be sold

The number of shares of stock to be sold = Amount raised / Price of the stock

= $94,000,000 / $13.65 per share

= 6,886,447 Shares

“Hence, the number of shares of stock to be sold will be 6,886,447 Shares”