The firm you are CEO if has a current period cash flow of 1.0 million and pays no dividend. The present value of the companys future cash flows is $2.5 million. The company is entirely financed with equity and there are 350,000 shares outstanding. Assume the dividend tax rate is zero. What is the share price of your firm? Suppose you and the board announce a plan to pay out 60 percent of the current cash flows as a dividend to its shareholders. How can a shareholder, who owns 1000 shares, achieve a zero pay-out policy on their own?

Answers:

Share price = $10.00, purchase 206.90 shares

Share price = $7.14, purchase 315.79 shares

Share price = $10.00, purchase 171.43 shares