Question
Ajax Limited an all equity financed firm has 100,000 shares outstanding. It is about to pay $2 per share dividend and its dividends are expected
Ajax Limited an all equity financed firm has 100,000 shares outstanding. It is about to pay $2 per share dividend and its dividends are expected to decline at the rate of 2% per year in perpetuity. The required rate of return on Ajax stock is 12%. a. What is the value of the firm before paying out the dividend? b. What is the ex-dividend price of Ajaxs stock, if the Board of Directors follows the current policy? c. At the dividend declaration meeting, several board members claimed that the dividend is too meager and is probably depressing the Ajaxs stock price. They proposed that Ajax sell enough shares to finance a $4 dividend per share now and the next year. 1. Comment on the claim that the low dividend is depressing the stock price. Support your argument with calculations. 2. If the proposal is adopted, at what price will the new shares sell and how many will be sold?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started