The Nilpoj Corporation has 1 million shares outstanding with a total market value of $20 million Nilpoj is expected to pay $1 million of dividends at the end of the year (i e one year from now), and thereafter the amount paid out is expected to grow by 5 a year in perpetuity Thus the expected dividend at the end of the second year is $1 05 million, and so on However, the company has just announced that this yearis dividend will be increased to $2 million (from the original plan of $1 million), and that the extra cash will be raised at the end of the year by an issue of shares After that, the total amount paid out in dividends each year will be as previously forecast, i e $1 05 million at the end of year 2 and increasing at 5 a year in each subsequent year Note that Nilpojis current market value is what investors believe it is worth under the old, previously announced dividend policy (a) What is Nilpojis cost of capital (b) What will the total value of the Orm be at the end of the year (after the extra cash is raised and after the $2 million dividend is paid out) (c) How many shares will the Orm need to issue, and what is the price per share at the end of the year (after the extra cash is raised and after the $2 million dividend is paid out) (d) What fraction of future dividends (starting with the second year dividends) belongs to the original shareholders (e) Show that the original shareholders are not made better o by this decision (i e show that the present value of the cash aows to the original shareholders remains $20 million)

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The Nilpoj Corporation has 1 million shares outstanding with a total market value of $20 million. Nilpoj is expected to pay $1 million of dividends

The Nilpoj Corporation has 1 million shares outstanding with a total market value of $20 million. Nilpoj is expected to pay $1 million of dividends at the end of the year (i.e. one year from now), and thereafter the amount paid out is expected to grow by 5% a year in perpetuity. Thus the expected dividend at the end of the second year is $1.05 million, and so on.

However, the company has just announced that this yearis dividend will be increased to $2 million (from the original plan of $1 million), and that the extra cash will be raised at the end of the year by an issue of shares. After that, the total amount paid out in dividends each year will be as previously forecast, i.e. $1.05 million at the end of year 2 and increasing at 5% a year in each subsequent year. Note that Nilpojis current market value is what investors believe it is worth under the old, previously-announced dividend policy.
1. (a) What is Nilpojis cost of capital?
2. (b) What will the total value of the Orm be at the end of the year (after the extra cash is raised and after the $2 million dividend is paid out)?
3. (c) How many shares will the Orm need to issue, and what is the price per share at the end of the year (after the extra cash is raised and after the $2 million dividend is paid out)?
4. (d) What fraction of future dividends (starting with the second-year dividends) belongs to the original shareholders?
5. (e) Show that the original shareholders are not made better o by this decision (i.e. show that the present value of the cash aows to the original shareholders remains $20 million).