HKU 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? (6 marks)