1. Red Bull F1 has 1 million shares outstanding with a total market value of $20 million. The firm is expected to pay $1 million in dividends next year, and thereafter the amount paid out is expected to grow at 5% p.a. in perpetuity. However, the company has heard that the value of a share depends on the flow of dividends, and therefore, announces that near year's dividend will be increased to $2 million and that the extra cash will be raised immediately afterward by an issue of shares. After the issue, the total amount paid out each year will be as previously forecasted. That is $1.05 million in year 2, $1.1025 million in year 3 etc. increasing by 5%. At what price will the new shares be issued in year 1? b. How many shares will the form need to issue? What will be the expected dividend payments on these new shares, and what therefore will be paid out to old shareholders after year 1? a. C. d. Show that the present value of the cash flows to current shareholders remains $20 million.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Tutorial 3
Ch. 16 Questions 19, 21 and 22 and Challenge Question 29:
1. Red Bull F1 has 1 million shares outstanding with a total market value of $20 million.
The firm is expected to pay $1 million in dividends next year, and thereafter the amount
paid out is expected to grow at 5% p.a. in perpetuity. However, the company has heard
that the value of a share depends on the flow of dividends, and therefore, announces that
near year's dividend will be increased to S2 million and that the extra cash will be raised
immediately afterward by an issue of shares.. After the issue, the total amount paid out
each year will be as previously forecasted. That is $1.05 million in year 2, $1.1025
million in year 3 etc. increasing by 5%.
At what price will the new shares be issued in year 1?
a.
b. How many shares will the form need to issue?
What will be the expected dividend payments on these new shares, and what
therefore will be paid out to old shareholders after year 1?
d. Show that the present value of the cash flows to current shareholders remains $20
million.
C.
Transcribed Image Text:Tutorial 3 Ch. 16 Questions 19, 21 and 22 and Challenge Question 29: 1. Red Bull F1 has 1 million shares outstanding with a total market value of $20 million. The firm is expected to pay $1 million in dividends next year, and thereafter the amount paid out is expected to grow at 5% p.a. in perpetuity. However, the company has heard that the value of a share depends on the flow of dividends, and therefore, announces that near year's dividend will be increased to S2 million and that the extra cash will be raised immediately afterward by an issue of shares.. After the issue, the total amount paid out each year will be as previously forecasted. That is $1.05 million in year 2, $1.1025 million in year 3 etc. increasing by 5%. At what price will the new shares be issued in year 1? a. b. How many shares will the form need to issue? What will be the expected dividend payments on these new shares, and what therefore will be paid out to old shareholders after year 1? d. Show that the present value of the cash flows to current shareholders remains $20 million. C.
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In the first part, how did you get the new price* new shared issued as 1000000? I am very confused. 

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