Consolidated Pasta is currently expected to pay annual dividends of $10 a share

Question

Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 1.8 million shares that are outstanding. Shareholders require a rate of return of 8% from Consolidated stock.

c. How much new equity capital will the company need to raise to finance the extra dividend payment? (Enter your answer in millions.)

d. What will be the total present value of dividends paid each year on the new shares that the company will need to issue? (Enter your answer in millions.)

e. What will be the transfer of value from the old shareholders to the new shareholders? (Enter your answer in millions.)

Explanation / Answer

a)

P = D1 / r

P = 10 / 8% = 125

b)

market value = Shares * Price

= 1.8*125

= 225 million

c)

new dividend = 20*1.8 = 36 million

Pv of equity = 36 / (1+8%) = 33.33 million required

D)

Stock price =20/(1+8%) + 10 / 8% = 143.5

new stocks issued = 33.33*10^6 / 143.5 = 232288 shares

New dividend = 232288 * 10 = 2322880.37

PV = 2322880.37 / 8% = 29036004.65 = 29.036 = 29.04 million

E)

Transfer = 33.33 million

F)

Same

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