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 $580,000 next year and $920,000 in two years, Including the proceeds from the liquldation. There are 24,000 shares of stock outstanding and shareholders require a return of 14 percent. a. What Is the current price per share of the stock? (Do not round Intermedlate calculations and round your answer to 2 declmal places, e.g., 32.16.) b. The board of directors Is dissatisfied with the current dividend policy and proposes that a dividend of $690,000 be pald next year. To ralse the cash necessary for the Increased dividend, the company will sell new shares of stock. How many shares of stock must be sold? What is the new price per share of the existing shares of stock? (Do not round Intermedlate calculations and round your answers to 2 decimal places, e.g., 32.16.) ences Share price a. Shares soid b. New share price 4 of 11 Prev Mc Graw

Answer 1

Solution :-

(A) Cashflow in Year 1 = $580,000

Cashflow in Year 2 = $920,000

Discount Rate = 14%

Now PV of Cashflows = $580,000 / (1 + 0.14 ) + $920,000 / (1 + 0.14 )² = $1,216,682

Shares Outstanding = 24,000

Therefore Share Price = $1,216,682 / 24,000 = $50.70

(B)

Number of shares to be sold = ( $690,000 - $580,000 ) / 50.70 = 2170 Shares

Now the New Share Price =

Cashflow in Year 1 = $690,000

Cashflow in Year 2 = $920,000

Discount Rate = 14%

Now PV of Cashflows = $690,000 / (1 + 0.14 ) + $920,000 / (1 + 0.14 )² = $1,313,173

Shares Outstanding = 24,000 + 2,170 = 26,170

Therefore Share Price = $1,313,173 / 26,170 = $50.18

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