The Black Bone Company sells toys for pet dogs and products primarily to mail order and internet customers. The firm has $400,000 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 pay a liquidating dividend of $2.4 million to the firms shareholders. The firms shareholders require a 12 percent rate of return for investing in the all-equity-financed firm.

a What do you estimate the value of Black Bones equity to be today if it pays out a $400,000 cash dividend today and plans to pay $2.4 million liquidating dividend at the end of the year?

b If Black Bones board of directors decides to pay a $1.2million dividend today to its existing shareholders, selling new shares of common stock to raise the additional $800,000 it needs to pay cash dividend, what will be the value of the existing share of stock? The new shares