Homework Help is Here – Start Your Trial Now!
Business
Finance
ABC Corp. is an all-equity firm, and has 25,000 outstanding shares. The current earnings per share is $1.5. The expected value of the firm one year from now is $1,725,000. The firm currently has a 60% payout policy. The appropriate discount rate for the company is 12%, and the dividend tax rate is zero. We also assume that the market is efficient and frictionless. a) What is the company's stock price before paying the current dividend? What is the ex-dividend price of the company's stock if the board follows its current policy? b) At the dividend declaration meeting several board members claimed that the dividend is too meagre and is probably depressing the company's stock price. They proposed to switch to a 150% payout policy. Comment on the claim that the low dividend is depressing the stock price. Support your argument with calculation.

ABC Corp. is an all-equity firm, and has 25,000 outstanding shares. The current earnings per share is $1.5. The expected value of the firm one year from now is $1,725,000. The firm currently has a 60% payout policy. The appropriate discount rate for the company is 12%, and the dividend tax rate is zero. We also assume that the market is efficient and frictionless. a) What is the company's stock price before paying the current dividend? What is the ex-dividend price of the company's stock if the board follows its current policy? b) At the dividend declaration meeting several board members claimed that the dividend is too meagre and is probably depressing the company's stock price. They proposed to switch to a 150% payout policy. Comment on the claim that the low dividend is depressing the stock price. Support your argument with calculation.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 7P
See similar textbooks
icon
Related questions
Question

I was told to ask Bartleby writing (essays) and then redirected to come here. This is a Q&A question. Please answer any parts. 

ABC Corp. is an all-equity firm, and has 25,000 outstanding shares. The current earnings per share is $1.5. The expected value of the firm one year from now is $1,725,000. The firm currently has a 60% payout policy. The appropriate discount rate for the company is 12%, and the dividend tax rate is zero. We also assume that the market is efficient and frictionless. a) What is the company's stock price before paying the current dividend? What is the ex-dividend price of the company's stock if the board follows its current policy? b) At the dividend declaration meeting several board members claimed that the dividend is too meagre and is probably depressing the company's stock price. They proposed to switch to a 150% payout policy. Comment on the claim that the low dividend is depressing the stock price. Support your argument with calculation. c) If the proposed policy is adopted, the firm will have to sell new shares to finance its dividend. At what price will the new shares sell? How many will be sold? d) In the real world with taxes and market imperfections, what are the pros and cons of the proposed dividend policy in comparison with the current policy?
Transcribed Image Text:ABC Corp. is an all-equity firm, and has 25,000 outstanding shares. The current earnings per share is $1.5. The expected value of the firm one year from now is $1,725,000. The firm currently has a 60% payout policy. The appropriate discount rate for the company is 12%, and the dividend tax rate is zero. We also assume that the market is efficient and frictionless. a) What is the company's stock price before paying the current dividend? What is the ex-dividend price of the company's stock if the board follows its current policy? b) At the dividend declaration meeting several board members claimed that the dividend is too meagre and is probably depressing the company's stock price. They proposed to switch to a 150% payout policy. Comment on the claim that the low dividend is depressing the stock price. Support your argument with calculation. c) If the proposed policy is adopted, the firm will have to sell new shares to finance its dividend. At what price will the new shares sell? How many will be sold? d) In the real world with taxes and market imperfections, what are the pros and cons of the proposed dividend policy in comparison with the current policy?
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps with 3 images

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Basic Accounting Terms
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Corporate Fin Focused Approach
Corporate Fin Focused Approach
Finance
ISBN:
9781285660516
Author:
EHRHARDT
Publisher:
Cengage
SEE MORE TEXTBOOKS