Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the
Question:
Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 1 million shares that are outstanding. Shareholders require a 10% rate of return from consolidated stock.
a. What is the price of consolidated stock?
b. What is the total market value of its equity?
Consolidated now decides to increase next year's dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year.
c. How much new equity capital will the company need to raise to finance the extra dividend payment?
d. What will be the total present value of dividends paid each year on the new shares that the company will need to issue?
e. What will be the transfer of value from the old shareholders to the new shareholders?
f. Is this figure more than, less than, or the same as the extra dividend that the old shareholders will receive?
DividendA dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Perpetuity
Perpetuity refers to payments that are made without an end or maturity date. A perpetuity is classified as an annuity, which is something that earns a dividend or receives a payment at a regularly scheduled interval, generally yearly. So, how...
Step by Step Answer:
a b c d The present value of the new shares will need to be 10 million since that is the amoun...View the full answer
Fundamentals of Corporate Finance
ISBN: 978-0077861629
8th edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus
