Module 6 Question 8 (Dividend irrelevance of the timing of cash dividends) The Caraway Seed Company sells specialty gardening seeds and products primarily to mail-order and Internet customers. The firm has $200,000available for distribution as a cash dividend immediately and plans to shut down its business at the end of one year, at which time it will be prepared to pay a liquidating dividend of $1.20 million to the firm's stockholders. The firm's shareholders require a 10.0 percent rate of return for investing in the all-equity-financed firm. a. What do you estimate the value of Caraway's equity to be today if it pays out a $200,000 cash dividend today and plans to pay a $1.20 million liquidating dividend at the end of the year? b If Caraway's board of directors decides to pay a $600,000 dividend today to its existing shareholders using an equity offering selling new shares of common stock to raise the additional $400,000 it needs to make the cash dividend, what will be the value of the existing shares of stock? The new shares? Question content area bottom Part 1 a. The value of Caraway's equity today if it pays out a $200,000 cash dividend today and plans to pay a $1.20 million liquidating dividend at the end of the year is $______ .
Module 6 Question 8 (Dividend irrelevance of the timing of cash dividends) The Caraway Seed Company sells specialty gardening seeds and products primarily to mail-order and Internet customers. The firm has $200,000available for distribution as a cash dividend immediately and plans to shut down its business at the end of one year, at which time it will be prepared to pay a liquidating dividend of $1.20 million to the firm's stockholders. The firm's shareholders require a 10.0 percent rate of return for investing in the all-equity-financed firm. a. What do you estimate the value of Caraway's equity to be today if it pays out a $200,000 cash dividend today and plans to pay a $1.20 million liquidating dividend at the end of the year? b If Caraway's board of directors decides to pay a $600,000 dividend today to its existing shareholders using an equity offering selling new shares of common stock to raise the additional $400,000 it needs to make the cash dividend, what will be the value of the existing shares of stock? The new shares? Question content area bottom Part 1 a. The value of Caraway's equity today if it pays out a $200,000 cash dividend today and plans to pay a $1.20 million liquidating dividend at the end of the year is $______ .
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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Module 6 Question 8 (Dividend irrelevance of the timing of cash dividends)
The Caraway Seed Company sells specialty gardening seeds and products primarily to mail-order and Internet customers. The firm has $200,000available for distribution as a cash dividend immediately and plans to shut down its business at the end of one year, at which time it will be prepared to pay a liquidating dividend of $1.20 million to the firm's stockholders. The firm's shareholders require a 10.0 percent rate of return for investing in the all-equity-financed firm.
a. What do you estimate the value of Caraway's equity to be today if it pays out a
$200,000 cash dividend today and plans to pay a
$1.20 million liquidating dividend at the end of the year?
b If Caraway's board of directors decides to pay a
$600,000
dividend today to its existing shareholders using an equity offering selling new shares of common stock to raise the additional $400,000 it needs to make the cash dividend, what will be the value of the existing shares of stock? The new shares?Question content area bottom
Part 1
a. The value of Caraway's equity today if it pays out a
$200,000 cash dividend today and plans to pay a $1.20 million liquidating dividend at the end of the year is $______ .
Expert Solution
Step 1
A part of profits that the board of directors has decided to distribute to the company's shareholders as payment for their investment is known as a cash dividend.
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