(Related to Checkpoint 16.1) (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 $217,000 available 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 $1.31 million to the firm's stockholders. The firm's shareholders require a 10.3 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 $217,000 cash dividend today and plans to pay a $1.31 million liquidating dividend at the end of the year? b. If Caraway's board of directors decides to pay a $617,000 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?
(Related to Checkpoint 16.1) (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 $217,000 available 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 $1.31 million to the firm's stockholders. The firm's shareholders require a 10.3 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 $217,000 cash dividend today and plans to pay a $1.31 million liquidating dividend at the end of the year? b. If Caraway's board of directors decides to pay a $617,000 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?
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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Transcribed Image Text:(Related to Checkpoint 16.1) (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 $217,000 available 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 $1.31 million to the firm's stockholders.
The firm's shareholders require a 10.3 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 $217,000 cash dividend today and plans to pay a $1.31 million
liquidating dividend at the end of the year?
b. If Caraway's board of directors decides to pay a $617,000 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?
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