Please use the following information to answer the next TWO questions. SunFinance Inc. is an all-equity firm. The firm will pay $6.4 per share dividend next year and a liquidating dividend of $24 per share at the end of the 2nd year. The firm has 600,000 shares outstanding and the current share price is $22. Suppose you own 500 of SunFinance's shares. Assume zero taxes and a discount rate of 20%. 26. If you want to receive two equal payments over the next two years, how many shares should you buy or sell at the end of the first year? A. Buy 182 shares B. Sell 182 shares C. Buy 200 shares D. Sell 200 shares E. Sell 327 shares PV of the equal payment D should be the share price today: D/(1+0.2) + D/(1+0.2)^2 = 22 1.2D + D = 22*1.2^2 2.2D = 31.68 D = 14. 40 Page 10 of 11 you want to receive 500*14.40 = 7,200 You receive 500*6.4= 3,200 dividend You are 7,200 - 3,200 = 4,000 short. Share price at year 1 P1 = 24/(1+0.2) = 20 Need to sell 4,000/20 = 200 shares 27. If you want to receive exactly $1,500 at the end of the first year, how many shares should you buy or sell at the end of the first year? A. Buy 77 shares B. Sell 77 shares C. Buy 85 shares D. Sell 85 shares E. Buy 68 shares At the end of year 1, you want to receive 1,500 You receive 500*6.4= 3,200 dividend You have an extra 3,200 - 1,500 = 1,700 Share price at year 1 P1 = 24/(1+0.2) = 20 Need to buy 1,700/20 = 85 shares 28. A firm needs $6 million for new investments next year. Its target D/E ratio is 3/7 and the net income this year is $6.3 million. If the firm follows a residual dividend policy, what will be the amount of dividend (if any) this year? A. 0 B. 0.3 million C. 2.1 million D. 2.87 million E. 4.5 million D/E=3/7 -> D/V = 3/10 =0.3 and E/V = 1-0.3 = 0.7 Debt financing for the new investment = 6m*0.3 = 1.8m Equity financing for the new investment = 6m*0.7 = 4.2m < NI of 6.3m The firm will pay out 6.3 - 4.2 = 2.1 million dividend this year.

please explain what formula and how?