What should be value of each share of stock in his company

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Reference no: EM131055262

Rodney Murdock just began operating his own business, the Murdock Construction Company. Murdock obtained $50 million of equity capital from friends and relatives by selling them an aggregate of 100,000 shares of stock. Rodney’s plan is to operate this business for a period of 5 years, at the end of which, he will dissolve the business and distribute any and all remaining equity capital to his investors. Instead of the $6 million first year profit predicted previously, Murdock now believes that, due to an improved construction process, that his company will be able to produce net income (after-taxes) equal to $7 million in his first year of operation, and expects his firm will continue to earn a constant return on equity (ROE) over the life of its operations. 1) If Murdock chooses to distribute 20% of his company’s profits each year as a dividend to his investors, what should be the value of each share of stock in his company if the investors require a return of 12%? 2) If Murdock chooses to distribute 40% of his company’s profits each year as a dividend to his investors, what should be the value of each share of stock in his company if the investors require a return of 12%? 3) Of the two dividend payout policies described in questions 6 and 7, which policy would you recommend Murdock pursue? Why?

Reference no: EM131055262

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