The net income of Novis Corporation is $90,000. The company has 35,000 outstanding shares, and a 100 percent payout policy. The expected value of the firm one year from now is $1,650,000. The appropriate discount rate for Novis is 11 percent, and the dividend tax rate is zero.
a. What is the current value of the firm assuming the current dividend has not yet been paid?
b. What is the ex-dividend price of Novis’s stock if the board follows its current policy?
c. At the dividend declaration meeting, several board members claimed that the dividend is too meager and is probably depressing Novis’s price. They proposed that Novis sell enough new shares to finance a $4.70 dividend.
i. Comment on the claim that the low dividend is depressing the stock price. Support your argument with calculations.
ii. If the proposal is adopted, at what price will the new shares sell and how many will be sold?