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Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 1.8 million shares that are outstanding. Shareholders require
Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 1.8 million shares that are outstanding. Shareholders require a 8% rate of return from Consolidated stock. What is the price of Consolidated stock? Stock price $ 125 What is the total market value of its equity? Market value of equity $ 225 million Consolidated now decides to increase next year's dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year. How much new equity capital will the company need to raise to finance the extra dividend payment? New equity $ 18 million What will be the total present value of dividends paid each year on the new shares that the company will need to issue? Present value $ million What will be the transfer of value from the old shareholders to the new shareholders? Transfer of value $ million Is this figure more than, less than, or the same as the extra dividend that the old shareholders will receive? More than Less than The same
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