Question

The quick buck company is an all equity firm that has been in existence for the past 3 years company management expects said the company will last for 2 more years and then be dissolved the firm would generate cash flows of $740000 next year and $1160000 in 2 years including the proceeds from the liquidation. there are 32000 shares of stock outstanding and shareholders require a return of 14% what is the current price per share of the stock? the board of directors is dissatisfied with the current dividend policy and proposes that a dividend of $850000 be paid next year to raise the cash necessary for the increased dividend, the company will sale of new shares of stock. how many shares of stock must be sold? what is the new price per share of the existing shares of stock?

Answer 1

1]	Current value of the firm = 740000/1.14+1160000/1.14^2 =	$          1,541,705
	Current price per share = 1541705/32000 =	$                   48.18
2]	Additional cash required for dividends = 850000-740000 =	$              110,000
	Number of shares to be sold = 110000-48.18 =	2283.11	shares
	New price per share of the existing stock = (850000/32000)/1.14+(1160000/34283.11)/1.14^2 =	$                   49.34