Question

The Quick Buck Company is an all-equity firm that has been in existence for the past three years. Company management expects that the company will last for two more years and then be dissolved. The firm will generate cash flows of $450,000 next year and $790,000 in two years, including the proceeds from the liquidation. There are 20,000 shares of stock outstanding and shareholders require a return of 12 percent. What is the current price per share of the stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Share price The board of directors is dissatisfied with the current dividend policy and proposes that a dividend of $580,000 be paid next year. To raise the cash necessary for the increased dividend, the company will sell new shares of stock. b-1. How many shares of stock must be sold? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b-2. What is the new price per share of the existing shares of stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b-1. Shares sold b-2. Share price

Answer 1

Giver ry ist or cash flows = $ 450000 and yr cash flows : 8 790000 a) Current price pershave of He stock is Present Agualue of all fiu cash flows to la 2 s number of shares outstanding ist yr Present warleee at discount factor of 12.2. 2450000 X0.8929 t witter :$ 401805 . and yr Present value at discount factor of 127. -790000 x0.7972 DÉO : 0 0 $ 629788 Current price of stocle - 401805 +629788 Flis 20000 103159351.5796 20000 Canfeat price per Share : 851.58 a 9

Ef dividend inereases 008580000 for next year Then the extra cash required to pay is. Droposed dividend - cash flow of nextyr - 580000 450000 $ 130 000 - Additional cash required 28 130000

bi) Number of shares of stock to be sold to raise the cash - 130000 - 2520.35 51.58 ino. of shares to be sold = 2520.36 10:2) New prio per share of the existingstockis 1031593 245.8071 EI 20000 +2520:36 $45.81 01) Shamos sold : 2520.36 D2) Share price 2 $ 45.81 |share