The Quick Buck Company is an all-equity firm that has been in existence for the
ID: 2714538 • Letter: T
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 $760,000 next year and $1,190,000 in two years, including the proceeds from the liquidation. There are 33,000 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).)
The Board of Directors is dissatisfied with the current dividend policy and proposes that a dividend of $840,000 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).)
Requirement 1: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).)
Explanation / Answer
(1) CASH FLOW NEXT YEAR=$7,60,000
CASH FLOW IN 2 YEARS=$11,90,000
NO.OF SHARES=33,000
REQUIRED RETURN=10%
CURRENT PRICE OF STOCK=$7,60,000PVIF(10%,1)+11,90,000PVIF(10%,2)
=$7,60,000*0.909+$11,90,000*0.826
=$6,90,840+$9,82,940
=$16,73,780
CURRENT PRICE PER SHARE OF STOCK=$16,73,780/33,000 SHARES=$50.72
(2)CASH FLOW NEXT YEAR=$7,60,000
DIVIDEND TO BE DISTRIBUTED=$8,40,000
VALUE OF SHARES TO BE SOLD=$8,40,000-$7,60,000=$80,000
NO.OF SHARES OF STOCK TO BE SOLD=VALUE OF SHARES TO BE SOLD/PRICE PER SHARE OF STOCK
=$80,000/$50.72
=1,578
(3)NEW PRICE PER SHARE OF THE EXISTING SHARES OF STOCK=11,90,000PVIF(10%,2)/33,000
=$29.79
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