A FOR NEXT TIME 1. Your company has 1 million shares outstanding. You pay an annual dividend of $5 per share and the next dividend is due today. The required rate of return on your equity (stock) is 10% per year. If you are expected to pay the $5 dividend forever, what is the current value of the company? What is the value of one share of stock? What will the value of the share of stock be immediately after the dividend is paid? This year, you unexpectedly generated an extra $2 million in cash flow. You are trying to decide whether to distribute the cash to your stockholders today along with your scheduled dividend, or reinvest it. What is the new value of the your stock if you decide to pay it out now? What will the value be immediately after you pay it out? You are looking at an investment opportunity that would require you to reinvest the $2 million instead of distributing it to stockholders. This opportunity has the same risk level as your current business and would have the same discount rate. Consider two scenarios: (a) your investment opportunity is expected to produce $2.3 million, which you will distribute as an extra dividend next year, and (b) your investment opportunity is expected to produce $2.1 million, which you will distribute as an extra dividend next year. Show that under scenario (a), the project has a positive NPV and the value of the stock (based on expected dividends) is higher than if you had distributed the $2 million immediately. Then show that under scenario (b), the project has a negative NPV and the value of the stock (based on expected dividends) is lower than if you had distributed the $2 million immediately. 2. Pick two industries and use finance.google.com to look-up some of the companies in those industries. Compare the multiples for the two industries and see if it matches your intuition about the relative risks and expected growth in those industries. 135