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 $720,000 next year and $1,130,000 in two years, including the proceeds from the liquidation. There are 31,000 shares of stock outstanding and shareholders require a return of 13 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 $830,000 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).)

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 $720,000 next year and $1,130,000 in two years, including the proceeds from the liquidation. There are 31,000 shares of stock outstanding and shareholders require a return of 13 percent.

Explanation / Answer

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).) Dividend per share in first year (D1) = $720,000/31,000 shares $23.23 per share Dividend per share in first year (D2) = $1,130,000/31,000 shares $36.45 per share Year Dividend PV @ 13% Present Value 1 $23.23 0.8850 $20.55 2 $36.45 0.7831 $28.55 Share price $49.1 The Board of Directors is dissatisfied with the current dividend policy and proposes that a dividend of $830,000 be paid next year. To raise the cash necessary for the increased dividend, the company will sell new shares of stock. Requirement 2: How many shares of stock must be sold? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Dividend paid next year $830,000 Share Price $49.1 Number of shares repurchased = $830,000/$49.1 16,904 shares Shares sold 16,904 shares Requirement 3: 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).) Dividend paid next year $830,000 Shares outstanding ($31000 - 16904) 14096 New price per Share = $830,000/14096 shares $58.88

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