PROBLEM:

The Caraway Seed Company sells specialty gardening seeds and products primarily to mail-order and Internet customers. The firm has $206,000 available for distribution as a cash dividend immediately and plans to shut down its business at the end of one year, at which time it will be prepared to pay a liquidating dividend of $1.35 million to the firm's stockholders. The firm's shareholders require a 10.3 percent rate of return for investing in the all-equity-financed firm.

a.What do you estimate the value of Caraway's equity to be today if it pays out $206,000 cash dividend today and plans to pay a $1.35 million liquidating dividend at the end of the year?

b. If Caraway's board of directors decides to pay a $618,000 dividend today to its existing shareholders using an equity offering selling new shares of common stock to raise the additional$412,000 it needs to make the cash dividend, what will be the value of the existing shares of stock? The new shares?

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QUESTIONS:

(A.) The value of Caraway's equity today if it pays out a $206,000 cash dividend today and plans to pay a $1.35 million liquidating dividend at the end of the year is $(?). (Round to the nearest dollar.)

(B.)If Caraway's board of directors decides to pay a $618,000 dividend today to its existing shareholders using an equity offering selling new shares of common stock to raise the additional $412,000 it needs to make the cash dividend, the value of the existing shares of stock will be $(?). (Round to the nearest dollar.)

The value of the new shares will be $(?). (Round to the nearest dollar.)