Little Oil has outstanding 1 million shares with a total market value of $27 million. The firm is expected to pay $1.00 million of dividends next year, and thereafter, the amount paid out is expected to grow by 4% a year in perpetuity. Thus, the expected dividend is $1.04 million in year 2, $1.0816 million in year 3, and so on. However, the company has heard that the value of a share depends on the flow of dividends, and therefore, it announces that next 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 that, the total amount paid out each year will be as previously forecasted, that is, $1.04 million in year 2 and increasing by 4% in each subsequent year. a. At what price will the new shares be issued in year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. How many shares will the firm need to issue? (Do not round intermediate calculations. Round your answer to the nearest whole number.) c. What will be the expected dividend payments on these new shares, and what, therefore, will be paid out to the old shareholders after year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. Recalculate the present value of the Price per share to current shareholders. (Do not round intermediate calculations. Round your answer to the nearest whole dollar.)
Little Oil has outstanding 1 million shares with a total market value of $27 million. The firm is expected to pay $1.00 million of dividends next year, and thereafter, the amount paid out is expected to grow by 4% a year in perpetuity. Thus, the expected dividend is $1.04 million in year 2, $1.0816 million in year 3, and so on. However, the company has heard that the value of a share depends on the flow of dividends, and therefore, it announces that next 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 that, the total amount paid out each year will be as previously forecasted, that is, $1.04 million in year 2 and increasing by 4% in each subsequent year. a. At what price will the new shares be issued in year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. How many shares will the firm need to issue? (Do not round intermediate calculations. Round your answer to the nearest whole number.) c. What will be the expected dividend payments on these new shares, and what, therefore, will be paid out to the old shareholders after year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. Recalculate the present value of the Price per share to current shareholders. (Do not round intermediate calculations. Round your answer to the nearest whole dollar.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Little Oil has outstanding 1 million shares with a total market value of $27 million. The firm is expected to pay $1.00 million
of dividends next year, and thereafter, the amount paid out is expected to grow by 4% a year in perpetuity. Thus, the
expected dividend is $1.04 million in year 2, $1.0816 million in year 3, and so on. However, the company has heard that
the value of a share depends on the flow of dividends, and therefore, it announces that next 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 that, the
total amount paid out each year will be as previously forecasted, that is, $1.04 million in year 2 and increasing by 4% in
each subsequent year.
a. At what price will the new shares be issued in year 1? (Do not round intermediate calculations. Round your answer to
2 decimal places.)
b. How many shares will the firm need to issue? (Do not round intermediate calculations. Round your answer to the
nearest whole number.)
c. What will be the expected dividend payments on these new shares, and what, therefore, will be paid out to the old
shareholders after year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
d. Recalculate the present value of the Price per share to current shareholders. (Do not round intermediate calculations.
Round your answer to the nearest whole dollar.)
a. Price per share
b. Number of shares
Dividend per share
d. Present value
C.
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