Liquidating dividend and the firm will cease to exist

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Reference no: EM131188350

DM Inc. is expected to pay dividends of $150 per share at the end of one year and $150 at the end of the second year. The dividend in the second year is a liquidating dividend and the firm will cease to exist. Investors require a 13% return on investments of this type. There are 300 shares of stock outstanding. The firm is considering an alternate dividend policy that will pay out $175 in dividends per share the first year. Under the alternative plan, any shortfall in funds will be raised by selling new equity. There are no taxes, transaction costs, or other market imperfections. a. What is DDM Inc.'s stock price before the alternative dividend plan is adopted? b. What will be DDM Inc.'s stock price once the alternate dividend plan is adopted? c. Under the alternative dividend plan, what will DDM Inc. pay to the old stockholders as a dividend in year 2? d. Assume an investor owns 15 shares of the firm's stock and wishes to create the alternate dividend plan without the aid of the firm. Is this possible, and if so, how? e. Assume an investor owns 15 shares of the firm's stock and wishes to undo the firm's proposed alternate dividend plan. Is this possible, and if so, how?

Reference no: EM131188350

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