Question
Little Oil has outstanding one million shares with a total market value of $20 million. The firm is expected to pay $1 million of dividends
Little Oil has outstanding one million shares with a total market value of $20 million. The
firm is expected to pay $1 million of dividends next year, and thereafter the amount paid out
is expected to grow by 5% a year in perpetuity. Thus the expected dividend is $1.05 million
in year 2, $1.105 million in year 3, and so on. However, the company has heard that the
value of a share depends on the flow of dividends, and therefore it announces that next
year's dividend will be increased to $2 million and that the extra cash will be raised
immediately by an issue of shares. After that, the total amount paid out each year will be as
previously forecasted, that is, $1.05 million in year 2 and increasing by 5% in each
subsequent year.
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