You are interested in purchasing enough number of shares in ABC manufacturing so

Question

You are interested in purchasing enough number of shares in ABC manufacturing so that you can be guaranteed a seat on the board of directors when the next annual shareholder’s meeting is held. ABC manufacturing currently has 10,000 shares outstanding. The corporation has not paid any dividends last year, but is expected to pay an annual dividend of $2.00/share at the end of year 2. During years 3-6 the company is expected to grow its dividends by 15% a year. Starting year 7, the company is expected to pay dividends that are growing only 4%/year from then on.

MUST SHOW WORK. MUST INCLUDE FORMULAS

1. Calculate the dividends the company will pay during years 2-7.

2. Assuming the required rate of return of 12% APR, calculate the value of one share of stock at the end of year 6 using the dividend growth model.

3. Assuming the required rate of return of 12% APR, calculate the value of one share of stock as of today (Year 0).

4. Assume that the board of directors have 12 members. How much money you need to spend now, in order to guarantee that you have a seat on the board of the company uses straight voting in the election for the board.

5. Assume that the board of directors have 6 members. How much money you need to spend now, in order to guarantee that you have a seat on the board of the company uses cumulative voting in the election for the board.

Explanation / Answer

Qn no 1.

Qn no 2.

Dividend Growth Model:

P=D/k-g
Where: P=security's price; D=dividend payout ratio; k=required rate of return; g=dividends' expected growth rate.

Value of one share of stock at the end of year 6 :
P= 3.5/(.12-.04) = $43.75

Qn no 3 .

Total Present value of Dividends upto year 6:

Present Value of $43.75 = 43.75*.452=$19.79

So,the value of one share of stock as of today (Year 0) = $19.79 + $8.41 = $28.20

Qn no 4.

One has to buy more than 50% shares using straight voting in order to guarantee that he has a seat on the board of the company. So he has to buy = 10000*.5+1=5001 shares

And money required = 5001*28.2 = $141,028.20

Year Dividend/Share $ Dividend Growth 0 1 2 2 3 2.3 15% 4 2.65 15% 5 3.04 15% 6 3.50 15% 7 3.64 4%

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