Question

Corporate Finance Midterm Initials 3) The common stock for Ignacio Corp sells for $20/share and offers the following expected payoffs for next year. (20 Points) Dividend Stock Price after Dividend 16 Ignacio Corp Expected Payouts Bust Normal Economy Boom 22 24 A) Assuming a normal economy, what is the expected dividend yield and capital gains percent return for Ignacio Corp? (4 Points) B) Assuming a boom economy, what is the expected total return for an investment in Ignacio Corp? (2 Points) (4 Points) cl in a boom scenario, if Ignacio decides not to pay the dividend, but instead bought back shares with cash, what would the share price be? (4 points)

Answer 1

A)

For Normal Economy, Expected dividend yield = (Expected dividend/Price of the share) = 4/22 = 18.18%

Capital gain % = ( Final price - Initial Price)/Initial Price = (22 - 20)/20 * 100 = 10%

B)

For Boom Economy,

Expected total return = (Dividends + Final price - Initial Price)/Initial Price * 100 = (6+24 -20)/20 * 100 = 50%

C)

Share Price = Share price + dividends = 24 + 6 = $ 30