Analyse the value of caraways equity

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Reference no: EM13128032

The Caraway Seed Company sells specialty gardening seeds and products primarily to mail-order and Internet customers. The firm has $200,000 available for distribution as a cash dividend immediately and plans to shut down its business at the end of one year, at which time it will be prepared to pay a liquidating dividend of $1.2 million to the firm's stockholders. The firm's shareholders require a 10% rate of return for investing in the all-equity financed firm.

(a) Analyse the value of Caraway's equity if it pays out a $200,000 cash dividend today and plans to pay a $1.2 million liquidating dividend at the end of one year.

(b) If Caraway's board of directors decides to pay a $600,000 dividend today to its existing shareholders using an equity offering selling new shares of common stock to raise the additional $400,000 it needs to make the cash dividend, what will be the value of the existing shares of stock? Compare your result with part (a) and explain your answer.

Reference no: EM13128032

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