The net income of Novis AS is 32,000 kroner (DKr). The company has 10,000 outstanding shares and a 100 per cent payout policy. The expected value of the firm one year from now is DKr1,545,600. The appropriate discount rate for Novis is 12 per cent, and the dividend tax rate is zero.

(a) What is the current value of firm assuming the current dividend has not yet been paid?

(b) What is the ex-dividend price of Novis’s equity if the board follows its current policy?

(c) At the dividend declaration meeting, several board members claimed that the dividend is too meagre and is probably depressing Novis’s price. They proposed that Novis sell enough new shares to finance a DKr4.25 dividend.

(i) Comment on the claim that the low dividend is depressing the share price. Support your argument with calculations.

(ii) If the proposal is adopted, at what price will the new shares sell? How many will be sold?