Company ‘1063 has a current period cash flow of $1.3 million and pays no dividen

Question

Company ‘1063 has a current period cash flow of $1.3 million and pays no dividends. The present value of the company’s future cash flows is $17 million. The company is entirely financed with equity, and has 400,000 shares outstanding. Assume the dividend tax rate is zero. i. What is the share price of the Company ‘1063 stock? ii. Suppose the board of directors of Company ‘1063 announces its plan to pay out 50 per cent of its current cash flow as cash dividends to its shareholders. How can Tom Dixon, who owns 1,000 shares of Company “1063” stock, achieve a zero payout policy on his own?

Explanation / Answer

Tom Dixon can prefer to sell his share, or can opt for a share dividend.

current period cashflow      1,300,000 present value of cashflow    17,000,000 TOTAL cash flow    18,300,000 shares outstanding          400,000 Share price              45.75 (18300000/400000)

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