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Investing in the? all-equity-financed firm

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1. 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 $1.20 million to the? firm's stockholders. The? firm's shareholders require a 10.0 percent rate of return for investing in the? all-equity-financed firm.

a. What do you estimate the value of? Caraway's equity to be today if it pays out a $200,000 cash dividend today and plans to pay a $1.20 million liquidating dividend at the end of the? 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? The new? shares?

2. After more than 40 years of? operation, the Tyler Brick Mfg. Company has decided it is time to shut down the business. The firm has ?$151,000 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 to the? firm's stockholders of $13.8 million. The? firm's shareholders require a 14.7 percent rate of return for investing in the? all-equity financed firm.

a. What do you estimate the value of? Tyler's equity to be today if it pays out a $151,000 cash dividend today and plans to pay out a $13.8 million liquidating dividend at the end of the? year?

b. If? Tyler's board of directors decides to pay a $1,900,000 dividend today to its existing shareholders and uses an equity offering selling new shares of common stock to raise the additional funds that it needs to make the cash? dividend, what will be the value of the existing shares of?stock? The new? shares?

Reference no: EM132481607

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