Dividend-share you can pay original shareholders in year

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Reference no: EM131576524

1. Your all-equity firm will dissolve in two years and will generate $100,000 in year 1 and $300,000 in year 2. Currently, there are 200,000 shares outstanding. Required return is 11%. You are considering between two policy alternatives:

Policy I: You payout dividends equal to the cash flow in each year.

Policy II: You payout your entire cash flow for the remaining two years in year 1 (as dividends).

a. In Policy I, calculate the dividend/share can you pay in year 1 and in year 2? (2)

b. In Policy II, what is the maximum you can borrow from new shareholders in year 1? (2)

c. Calculate the dividend/share you can pay the original shareholders in year 1 for Policy II? (2)

d. Calculate the stock price for Policy I and Policy II. (2)

e. True/False: When taking into account flotation costs, the firm would prefer to go with Policy I over Policy II. (1)

Reference no: EM131576524

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