You are interested in purchasing enough number of shares in SMITH Chemical Inc.

Question

You are interested in purchasing enough number of shares in SMITH Chemical Inc. so that you can be guaranteed a seat on the board of directors when the next annual shareholder’s meeting is held. SMITH Chemincal 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

Details Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Dividend Growth rate   15.0% 15.0% 15.0% 15.0% 4.0%          1 Dividend Expected Year 2-7            2.00          2.30      2.65      3.04      3.50         3.64          2 Stock Value at the end of year 6 D1=3.64 g=4% k=12% P=D1/(k-g)    =3.64/(0.12-0.04)    = $          45.50 So price of stock at Year 6 end =$45.50          3 Value of stock today Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Dividend Expected Year 2-7            2.00          2.30      2.65      3.04      3.50         3.64 Terminal Value of cash flows ate the end of Yr 7 =3.64*1.04/(0.12-0.04)=      47.32 Total Cash Flow            2.00          2.30      2.65      3.04      3.50      50.96 PV factor @12%              0.893         0.797       0.712    0.636    0.567    0.507      0.452 PV of Cash flows           1.594       1.637    1.681    1.726    1.772    23.051 Sum of PV of Cash flows= $          31.46 So Current Stock Price= $          31.46          4 No of shares outstanding              10,000 So in straight voting I need 5001 shares to ensure a Director position. Price per share =31.46 So Cost of 5001 shares =5000*31.46= $ 157,331.5 S my cost would be $157,331.50 in the straight   voting.          5 For cumulative voting the no of shares   Required> (S*X)/(D+1) Where S =no of shares voting in the election X =no of directors you want to elect D= no of directors up for election Here S=10000 X=1 D=12 So votes required=10000*1/(13) 769 So Minimum shares required =770 Cost of each share =31.46 Total Cost =770*31.46= $ 24,224.20 So in cumulative voting total cost =$24,224.20

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.