Refer to table 171 Pocket needs to hold on to 50000 of cash

Refer to table 17.1.

Pocket needs to hold on to $50,000 of cash for a future investment. Nevertheless it decides to pay a cash dividend of $2 per share and to replac the cash with a new issue of shares. After the dividend is paid and the new stock is issued:

A- what will be the price per share?

B- what will be the total value of the company?

C- what will be the total value of the stock held by new investors?

D- what will be the wealth of the existing investors including the dividend payments?

Please show all work.

Greetings,

A) Cash available = 150000

Cash needed for future expenses = 50000 Cash dividend proposed = 100000*2 = 200000 Hence total cash requirement = 250000

Therefore shares to be issued for 250000 - 150000 = 100000

Dividend will be paid on old shares only, hence value of the firm before issue of new shares = 1100000 - 200000 = 900000

Share price after dividend = 900000/100000 = 9/share

New shares to be issued = 100000/9 = 11111

Share price after dividend and share issue will remain to be 9 per share as issue of shares is made at market price.

B) Value of the Company = (100000+11111)*9 = 1000000

C) Value of the stock of new investors = 100000

D) Wealth of existing investors will remain to be 1100000 including dividend. Wealth is not affected by dividend declaration in a perfect market. Further if new shares are issued at market price, there is no change in the wealth of existing investors.

Refer to table 171 Pocket needs to hold on to 50000 of cash

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