Question

a firm has no debt and is valued at $80 with 10 shares of stock. if it decides to issue new shares to pay dividends of $2 per share, what is the number of shares issued? the price of new shares?

Answer 1

Sol:

Firm value = $80

Number of shares = 10

Dividend per share = $2

Dividend value = Number of shares x Dividend per share

Dividend value = 10 x $2 = $20

Percentage of Dividend = Dividend value / Firm value

Percentage of Dividend = $20 / $80 = 25%

Number of new shares issued = Number of shares x Percentage of Dividend

Number of new shares issued = 10 x 25% = 2.5 shares.

Total shares issued = Number of shares + Number of new shares issued

Total shares issued = 10 + 2.5 = 12.5 shares

Price of new shares = Firm value / Total shares issued

Price of new shares = $80 / 12.5 = $6.40 per share