1. Your all-equity firm will dissolve in two years and will generate $100,000 in year 1 and $300,000 in year 2. Currently, there are 20,000 shares outstanding. Required return is 11%. You are considering among three dividend policy alternatives:

Policy I: You maintain a 100% dividend payout ratio in each year. Policy II: You payout your entire cash flow for the remaining two years, all in year 1.

Policy III: You pay nothing in year 1 and all of your cash flow in year 2.

a. In Policy I, calculate the dividend/share can you pay in year 1 and in year 2.

b. In Policy II, what is the maximum you can borrow from new shareholders in year 1?

c. In Policy II, what is the dividend/share you can pay the original shareholders in year 1?

d. In Policy III, what is the dividend/share you can pay the shareholders in year 2?

e. Calculate the stock price for your firm.

f. (Multiple choice): When taking into account flotation costs, you should recommend that your firm should not go which policy [I, II, or III]? (1)