BS Direct Management Spinbotcomreation Tool Liberty Unive My

BS Direct: Management Spinbot.com-.reation Tool. Liberty Unive... My eContent Blackboard Learn>> Chapter 17 Help Save & Exlt Submlt Check my work 2 s currently expected to pay annual dividends o 10 a share in perpetuity on the 1.9 million shares that are outstandi e a rate of return of 10% from consolidated stock. a. What is the price of Consolidated stock? (Do not round Intermediate calculations.) points eBook Print b. What is the total market value of its equity? (enter your answer in milions.) References Market value of equity million Consolidated now decides to increase next year\'s dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year. c. How much new equity capital will the company need to raise to finance the extra dividend payment? (Enter your answer in millions.) New equity million K Prev 2 of 3 Next

Solution

A:

Price of a stock = PV of dividend per share

Price of a stock = 10/0.10 = $100

B:

Total value of equity = 100*1.9 = $190 million

C:

Price of a stock = 20/1.10 + (10/0.10)*(1/1.10) = $109.0909

Total value of equity = 109.09*1.9 = $207.27 million

Extra equity required = 207.27 - 190 = $17.27 million

D:

PV of extra dividends paid = $17.27 million