Consolidated now decides to increase next year’s dividend to $20 a share, withou
ID: 2737470 • Letter: C
Question
Consolidated now decides to increase next year’s dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year.
How much new equity capital will the company need to raise to finance the extra dividend payment?(Enter your answer in millions.)
What will be the total present value of dividends paid each year on the new shares that the company will need to issue? (Enter your answer in millions.)
What will be the transfer of value from the old shareholders to the new shareholders? (Enter your answer in millions.)
Is this figure more than, less than, or the same as the extra dividend that the old shareholders will receive?
Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 2.1 million shares that are outstanding. Shareholders require a 10% rate of return from Consolidated stock.Explanation / Answer
a.
Stock Price = Dividend/Return rate
= $10/10% = $ 100
b.
Market Value of Equity
The Number shares = 2.1 miillion
Stock Price = $ 100
Market Value of Equity = 2.1*100 = $ 210 million
Consolidated now decides to increase next year’s dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year.
c.
Now Dividend per share = $ 20
Number of shares = 2.1 millions
Total Dividend Paid = $ 20 * 2.1 = $ 42 millions
New Equity Capital = $ 42 million.
d.
Dividend policy of $ 10 million paid per year.
Old Equity Capital Shares = 2.1 million
New Equity capital shares (42/100) = 0.42 million
Total Number of shares = 2.52 million
Dividend per share = 10/2.52 = $ 3.96
Total present value of dividends paid each year on the new shares that the company will need to issue =
= $ 3.96* 0.42 million = $ 1.6632 million
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