Please show all work. The answer must be A, B, or C below to be correct. Thank y

Question

Please show all work. The answer must be A, B, or C below to be correct. Thank you in advance for your help! The first person said $50. What about current period cash flow of $1.75 Million making it $53.50 current value. I also need the second half of the question answered.   If you could be descriptive and answer the full questions this time around it would be appreciated. Qustion is below:

The firm you are CEO if has a current period cash flow of 1.75 million and pays no dividend. The present value of the company’s future cash flows is $25.0 million. The company is entirely financed with equity and there are 500,000 shares outstanding. Assume the dividend tax rate is zero.

                What is the share price of your firm?

Suppose you and the board announce a plan to pay out 40 percent of the current cash flows as a dividend to its shareholders. How can a shareholder, who owns 1000 shares, achieve a zero pay-out policy on their own?

A.) Share price = $53.50, purchase 26.87 shares

B.) Share price = $50.00, purchase 28.81 shares

C.) Share price = $53.50, purchase 26.17 shares

Explanation / Answer

Value of firm = PV of future cash flow + current period cash flow = 25 + 1.75 = 26.75m

Share price = value of firm/ no. of outstanding shares = 26.75/.5 = 53.5

Current cash flow per share = 1.75/.5 = $3.5

payout for 1000 shares = 3.5* 40% *1000 = $1400

Drop in share price due to payout = 1.75*.4/.5 = 1.4

Price after payout = 53.5 - 1.4 = 52.1

Number of shares to be bought = 1400/52.1 = 26.87

There fore option A is correct

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

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