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Saskatchewan Fine Jewellery (SFI) is expected to earn $180,000 per year for the next two years. The firm will be liquidated at the end of
Saskatchewan Fine Jewellery (SFI) is expected to earn $180,000 per year for the next two years.
The firm will be liquidated at the end of Year 2 but no cash proceeds will be generated from the
liquidation. The firm's investors require 15% return. Management is considering what to do with the cash that will be generated at the end of the first year. It can pay the entire earnings in
dividends (100% dividend payout policy). Alternatively, it can pay 40% in dividends (40% payout policy) and reinvest the remaining amount in a project code named JX. Project JX is expected to generate 16% return at the end of its first year of operation after which JX will be sold, and the initial investment will be fully recovered (also 1 year after acquiring JX)
C. What will be the firm's value under the 40% dividend policy?
d. Management decides to adopt the 40% dividend policy and invest in JX. What would be SFI's share price at the end of Year 1 immediately after paying the 40% of Year I's cash flows as
dividends?
e. Under the 40% dividend policy, how many shares John must sell immediately after receiving his Year I's dividends to obtain his target spendung income from SFI?
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