Gibson Co. has a current period cash flow of $4 million and pay no dividends. Th

Question

Gibson Co. has a current period cash flow of $4 million and pay no dividends. The PV of the company’s future cash flow is $36 million. The company is entirely financed with equity and has 100,000 shares outstanding. Assume the dividend tax rate is zero. 1. What is the share price of Gibson’s stock? 2. Suppose Gibson announces its plan to pay out 40% of its current cash flow as cash dividends to its shareholders. How can Je Miller, who owns 1000 shares of Gibson stock, gets a dividend per share of $4? If so, how many shares does he own?

Explanation / Answer

1)Share price of gibson stock=(current+PV of future cash flow)/shares outstanding

=(4+36)/100,000=40*10^6/10^5=$400

2)

Dividends that he gets =( 4mn*.4*1000)/100,000=$16,000

Expected share price after dividend = ((16000*1000)+36mn))/100,000=$520

Number of shares that Jeff needs to buy = (16000/520)=31 shares

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