15. Dividend Policy Gibson Co. has a current period cash flow of $1.3 million an
ID: 2794625 • Letter: 1
Question
15. Dividend Policy Gibson Co. has a current period cash flow of $1.3 million and pays no dividends. The present value of the company's future cash flows is $18 million. The company is entirely financed with equity and has 550,000 shares outstanding. Assume the dividend tax rate is zero. a. What is the share price of the company's stock? b. Suppose the board of directors of the company announces its plan to pay out 50 percent of its current cash flow as cash dividends to its shareholders. How can Jeff Miller, who owns 1,000 shares of the company's stock, achieve a zero payout policy on his own?Explanation / Answer
a). Solution :- Calculation of price of the share of Gibson Co. :-
= (1.3 Million + 18 Million) / 0.55 Million ( 550000 can also be written as 0.55 Million)
= 19.30 Million / 0.55 Million
= $ 35.0909 (Rounded off to $ 35.10)
Conclusion :- Price of the share of Gibson Co. = $ 35.10 (approx).
b). Solution :-
Dividend received by Jeff Miller (Shareholder of Gibson co.) = 1300000 * 1000 * 50 % / 550000
= 650000000 / 550000
= $ 1181.82 (approx).
Market price of the share after the dividend declaration = [ (1181.82 * 1000) + 18000000 ] / 550000
= (1181820 + 18000000) / 550000
= 19181820 / 550000
= $ 34.876
Number of shares needed to be purchased by Jeff Miller in the given question = 1181.82 / 34.876
= 33.89 (Rounded off to 34 Shares)
Conclusion :- Jeff Miller need to purchase 34 shares of Gibson Co. to achieve the zero payout policy on his own.
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