Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

HBS is an all-equity firm and its net income is $135,000. The firm has 30,000 shares outstanding and has a dividend payout ratio of 1.

HBS is an all-equity firm and its net income is $135,000. The firm has 30,000 shares outstanding and has a dividend payout ratio of 1. 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 dividend. Senior management of the firm suggests that, to increase the stock price, the firm should sell enough new shares to increase dividend per share to $6.25. (a) What is the current dividend per share? (2 marks) (b) Do you think the new dividend policy can increase the stock price? Justify your answer with calculations. (12 marks) (c) To implement the new dividend policy, how many new shares will be sold and what is the price of the new shares?

These are my answer and I would like to check it:

2 a)

Current dividend per share= 135000/30000= $4.5

2b)

New Annual dividend: 6.25x (30000)= 187500

Debt equity Ratio: 135000/(1985000 x12%)=0.56675

Debt= (1-0.56675) x1985000= 860001.25

RE= 12% + 86001.25/135000(0.56675-0.43325) = 20.50%

So, the policy can increase stock price

2C)

how many share more:

30000 x(20.5044%)=6151 shares

So, the new share price is 1985000/135000 x (1+20.5044%)=$17.72

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Essentials Of Machine Learning In Finance And Accounting

Authors: Mohammad Zoynul Abedin, M. Kabir Hassan, Petr Hajek, Mohammed Mohi Uddin

1st Edition

0367480816, 978-0367480813

More Books

Students also viewed these Finance questions