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.

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

Share price _____ $

b. 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 and round your answer to 2 decimal places, e.g., 32.16.)

Shares sold _____?

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

New share price ___$?

Answer 1

Present Value of Cash flows = 740,000/(1.14) + 1,160,000/(1.14)²

= $1,541,705.14

Number of Shares= 32,000

a. Current Price per Share = $1,541,705.14/32,000

= $48.18

b.Required Dividend to be paid = $850,000

Less: Cash Flows next year = $740,000

Shortfall = $110,000

Number of shares required to be sold = 110,000/48.18

= 2,283.11 shares or 2,283 shares

Value of Stock = 850,000/(1.14) + 1,160,000/(1.14)²

= $1,638,196.37

Price per Share = 1,638,196.37/34,283

= $47.78