Problem 1. Payout policy (25 points) Alligator Inc. is an all-equity financed firm with the current market cap. of $40 mln and with 1 mln shares outstanding. The firm is expected to pay $2 min of dividends at the end of 2021, and thereafter the amount paid out is expected to grow by 5% a year in perpetuity. The firm used to reinvest 2/3 of its net income and is not going to change this policy to keep the current growth rates of earnings. The firm could be described as a stable growth and the market is perfect. Earlier today (January 1, 2021) the management has announced that 2021's dividend that will be paid on December 31, 2021 will be increased to $4 mln. After that, the total amount paid out each year will be as previously forecasted, namely, $2,1 mln in year 2 and increasing by 5 percent in each subsequent year. The extra cash will be raised before the payment by an issue of shares. 1.1. 1.2. Determine the intrinsic value of the new shares to be issued to finance the extra dividend payment at the end of the 2021. How many shares will the firm need to issue? (6 points) Calculate the EPS, DPS and investment cash flows (reinvestment) for the following three years (2021-2023). (7 points) Did the management succeed with the spot price increase as a result of the extra-dividend announcement? Support your answers with calculations (2 points) 1.3. Problem 1. Payout policy (25 points) Alligator Inc. is an all-equity financed firm with the current market cap. of $40 mln and with 1 mln shares outstanding. The firm is expected to pay $2 min of dividends at the end of 2021, and thereafter the amount paid out is expected to grow by 5% a year in perpetuity. The firm used to reinvest 2/3 of its net income and is not going to change this policy to keep the current growth rates of earnings. The firm could be described as a stable growth and the market is perfect. Earlier today (January 1, 2021) the management has announced that 2021's dividend that will be paid on December 31, 2021 will be increased to $4 mln. After that, the total amount paid out each year will be as previously forecasted, namely, $2,1 mln in year 2 and increasing by 5 percent in each subsequent year. The extra cash will be raised before the payment by an issue of shares. 1.1. 1.2. Determine the intrinsic value of the new shares to be issued to finance the extra dividend payment at the end of the 2021. How many shares will the firm need to issue? (6 points) Calculate the EPS, DPS and investment cash flows (reinvestment) for the following three years (2021-2023). (7 points) Did the management succeed with the spot price increase as a result of the extra-dividend announcement? Support your answers with calculations (2 points) 1.3
