Question
Perish Inc. has 200,000 shares outstanding. Earnings will be $800,000 at the end of year 1 and $1,000,000 at the end of year 2. An
Perish Inc. has 200,000 shares outstanding. Earnings will be $800,000 at the end of year 1 and $1,000,000 at the end of year 2. An investment outlay of $400,000 at the end of year 1 has already been decided upon. Perish is all-equity financed with a required rate of return of 15%. The firm will be liquidated after 2 years. Assume that the firm operates in perfect capital markets and that the firm's policy is to pay out any surplus cash as dividends. (a) What is the current share price of Perish's stock? (b) Walter owns 10% of Perish Inc. and wants an income from the firm of $20,000 at the end of year 1. Show how he can achieve this (without a change in the firm's dividend policy). What percentage of the firm will he own after the end of year 1 if he follows this strategy?
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