The net income of Zippy Corporation is $135,000. The company has 30,000 outstanding shares and a 100

Question:

The net income of Zippy Corporation is $135,000. The company has 30,000 outstanding shares and a 100 percent payout policy. The expected value of the firm one year from now is $1.985 million. The appropriate discount rate for the company is 12 percent and the dividend tax rate is zero.

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

b. What is the ex-dividend price of the company’s stock if the board follows its current policy? 609

c. At the dividend declaration meeting, several board members claimed that the dividend is too meager and is probably depressing the company’s price. They proposed that the company sell enough new shares to finance a $6.25 dividend.

i. Comment on the claim that the low dividend is depressing the stock 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?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Dividend
A 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...

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