year, and thereafter, the amount paid out is expected to grow by 4% a year in perpetuity. Thus,1 on in year 2, $1.0816 million in year 3, and so on. However, the company has heard that the value vidends, and therefore, it announces that next year's dividend will be increased to $2 million ane ediately afterward by an issue of shares. After that, the total amount paid out each year will be a million in year 2 and increasing by 4% in each subsequent year. what price will the new shares be issued in year 1? (Do not round intermediate calculations. R es.) ow many shares will the firm need to issue? (Do not round intermediate calculations. Round yo ber.) hat will be the expected dividend payments on these new shares, and what, therefore, will be pa year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.) ecalculate the present value of the Price per share to current shareholders. (Do not round intern ver to the nearest whole dollar.)
year, and thereafter, the amount paid out is expected to grow by 4% a year in perpetuity. Thus,1 on in year 2, $1.0816 million in year 3, and so on. However, the company has heard that the value vidends, and therefore, it announces that next year's dividend will be increased to $2 million ane ediately afterward by an issue of shares. After that, the total amount paid out each year will be a million in year 2 and increasing by 4% in each subsequent year. what price will the new shares be issued in year 1? (Do not round intermediate calculations. R es.) ow many shares will the firm need to issue? (Do not round intermediate calculations. Round yo ber.) hat will be the expected dividend payments on these new shares, and what, therefore, will be pa year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.) ecalculate the present value of the Price per share to current shareholders. (Do not round intern ver to the nearest whole dollar.)
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 9P
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Question
I need part b c and d
Transcribed Image Text:Little Oil has outstanding 1 million shares with a total market value of $21 million. The firm is expected to pay $1.00 million of dividends
next year, and thereafter, the amount paid out is expected to grow by 4% a year in perpetuity. Thus, the expected dividend is $1.04
million in year 2, $1.0816 million in year 3, and so on. However, the company has heard that the value of a share depends on the flow
of dividends, and therefore, it announces that next year's dividend will be increased to $2 million and that the extra cash will be raised
immediately afterward by an issue of shares. After that, the total amount paid out each year will be as previously forecasted, that is,
$1.04 million in year 2 and increasing by 4% in each subsequent year.
a. At what price will the new shares be issued in year 1? (Do not round intermediate calculations. Round your answer to 2 decimal
places.)
b. How many shares will the firm need to issue? (Do not round intermediate calculations. Round your answer to the nearest whole
number.)
c. What will be the expected dividend payments on these new shares, and what, therefore, will be paid out to the old shareholders
after year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
d. Recalculate the present value of the Price per share to current shareholders. (Do not round intermediate calculations. Round your
answer to the nearest whole dollar.)
a.
Price per share
$
21.00 O
b.
Number of shares
c.
Dividend per share
d.
Present value
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