The Quick Buck Company is an all-equity firm that has been in existence for the

Question

The Quick Buck Company is an all-equity firm that has been in existence for the past three years. Company management expects that the company will last for two more years and then be dissolved. The firm will generate cash flows of $680,000 next year and $1,070,000 in two years, including the proceeds from the liquidation. There are 29,000 shares of stock outstanding and shareholders require a return of 10 percent.

What is the current price per share of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Share Price_________

The Board of Directors is dissatisfied with the current dividend policy and proposes that a dividend of $790,000 be paid next year. To raise the cash necessary for the increased dividend, the company will sell new shares of stock

How many shares of stock must be sold? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

What is the new price per share of the existing shares of stock? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

New share price_________

The Quick Buck Company is an all-equity firm that has been in existence for the past three years. Company management expects that the company will last for two more years and then be dissolved. The firm will generate cash flows of $680,000 next year and $1,070,000 in two years, including the proceeds from the liquidation. There are 29,000 shares of stock outstanding and shareholders require a return of 10 percent.

Explanation / Answer

current price per share = current value of firm / number of shares

                                 = 1,502,482.70 / 29000

                                = $ 51.81 per share

2)Number of shares to sell =Dividend to be paid / Current price

                                        = 790,000 / 51.81

                                       = 15,248.02 shares

3)New value of firm = 1,502,482.70 + 780,000 (raised from new issue) - 780,000(dividend paid)

                            = $ 1,502,482.70

Number of shares = 29000 + 15248.02 = 44,248.02 shares

New price per share = 1502482.70 / 44248.02

                              = $ 33.96 per share

year cash flow present value@10% present value of cahs flow 1 680,000 .90909 618,181.20 2 1,070,000 .82645 884,301.50 current value of firm 1,502,482.70

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