Question
ABC is an all-equity firm and its net income is $135,000. The firm has 30,000 shares outstanding and has a 4.5 dividend .per share. The
ABC is an all-equity firm and its net income is $135,000. The firm has 30,000 shares outstanding and has a 4.5 dividend .per share. The value of the firm next year is expected to be $1.985 million. The cost of capital of the firm is 12%. Assume there is no tax for dividends. To increase the stock price, the firm should sell enough new shares to increase the dividend per share to $6.25.
Do you think the new dividend policy can increase the stock price? Justify your answer with calculations.
To implement the new dividend policy, how many new shares will be sold and what is the price of the new shares?
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