Question

Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 1.8 million shares that are outstanding. Shareholders require a 8% rate of return from Consolidated stock.

d. What will be the total present value of dividends paid each year on the new shares that the company will need to issue? (Enter your answer in millions.)

e. What will be the transfer of value from the old shareholders to the new shareholders? (Enter your answer in millions.)

Answer 1

Answer d)

Total Dividend = No of shares * Dividend Per Share

= 1,800,000 * 10

= 18,000,000

Present Value of Perpetuity = Total Dividend / Required Rate of Return

= 18,000,000 / 0.08

= 225,000,000

Answer e)

Transfer Value means value per share

Value per share = Total Present Value / no of shares

= 225,000,000 / 1,800,000

= $125 per share

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