Mr. Toriop owns 5000 shares of stock in Yummy Corporation. The company has announced that it will pay a dividend of $5 per share in one year and then a liquidating dividend of $50 per share in two years. The required return on ABC stock is 10%.

a.What is the current share price of your stock?

b.What will be the company's share price in one year?

c.Mr. Toriop wishes to have equal amount of dividend income for the next two years. How can he use homemade leverage on Yummy Corporation's dividends to achieve this goal? Check that the present value of the cash flows will be the same as they are before the homemade leverage. (Hint: Dividends will be in the form of an annuity.)

d.Suppose Mr. Toriop is thinking about buying a house for $220,000 in one year. How can he use homemade leverage on Yummy Corporation's dividends to achieve this goal? Check that the present value of the cash flows will be the same as they are before the homemade leverage.

e.Suppose Mr. Toriop is thinking about postponing the house purchase for two years, by which time the price of the house will have increased by $35,000. How can he use homemade leverage on Yummy Corporation's dividends to achieve this goal? Check that the present value of the cash flows will be the same as they are before the homemade leverage.

Dividend policy

a.Define the information content effect of a dividend, and discuss whether or not it conveys information about a firm's dividend policy.

b.Define the clientele effect of dividend policy, and discuss whether or not it conveys information about a firm's market value.

The management of Oodles N Noodles Inc. is contemplating a 20% stock dividend. The company currently has cash of $300,000, fixed assets of $3.5 million, and debt of $1million. Its net income for the most recent fiscal year was $500,000. The company's shares are currently selling for $15 per share, and it has one million shares outstanding. Assume that there are no costs associated with issuing a stock dividend.

a.Before issuing the stock dividend, the company's management would like to know the effect of such a stock dividend on the following:

i.The number of shares outstanding

ii.Earnings

iii.Market value of cash

iv.Market value of equity

v.Share price

vi.Earnings per share (EPS)

vii.Price-earnings ratio (P/E)

viii.Shareholders' wealth

b.The company's management would like to hold its earnings per share within the range of 0.4-0.6. Given this constraint, should the company go ahead with the stock dividend?

c.If all that the company's shareholders care about are their wealth and the P/E ratio, should the company go ahead with the stock dividend?