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Problem 4. The net income of Novis Corporation, which has 10,000 outstanding shares and a 100% payout policy, is $32,000 today. The expected value of
Problem 4. The net income of Novis Corporation, which has 10,000 outstanding shares and a 100% payout policy, is $32,000 today. The expected value of the firm one year hence is $1,545,600. The appropriate discount rate for Novis is 12%. (a) What is the current value of the firm? (b) What is the ex-dividend price of Novis' stock if the board follows its current dividend policy? How much is the dividend per share? (c) At the dividend declaration meeting, several board members claimed that the dividend is too meager and is probably depressing Novis' stock price. They propose that Novis sell enough new shares to finance a $4.25 dividend. Assume that the new shareholders are not entitled to this dividend (i.e., assume that their shares are issued ex-dividend). a. Comment on the claim that the low dividend is depressing the stock price. Support your argument with calculations. b. If the proposal is adopted, at what price will the new shares sell and how many will be sold
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