Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. accounting
  3. hbs is an all-equity firm and its net income is $1

HBS is an all-equity firm and its net income is $135,000. The firm has 30,000...

90.2K

Verified Solution

Question

Accounting

HBS is an all-equity firm and its net income is $135,000. The firm has 30,000 shares outstanding and has a dividend payout ratio of 1. The value of the firm next year is expected to be $1.985 million. The cost of capital of the firm is 12%. Assume there is no tax for dividend. Senior management of the firm suggests that, to increase the stock price, the firm should sell enough new shares to increase dividend per share to $6.25. (a) What is the current dividend per share? (2 marks) (b) Do you think the new dividend policy can increase the stock price? Justify your answer with calculations. (12 marks) (c) To implement the new dividend policy, how many new shares will be sold and what is the price of the new shares?

These are my answer and I would like to check it:

2 a)

Current dividend per share= 135000/30000= $4.5

2b)

New Annual dividend: 6.25x (30000)= 187500

Debt equity Ratio: 135000/(1985000 x12%)=0.56675

Debt= (1-0.56675) x1985000= 860001.25

RE= 12% + 86001.25/135000(0.56675-0.43325) = 20.50%

So, the policy can increase stock price

2C)

how many share more:

30000 x(20.5044%)=6151 shares

So, the new share price is 1985000/135000 x (1+20.5044%)=$17.72

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students

Q

1. Read the case study below, and put yourself in Maria's position to answer these questions: What...

Psychology
Q

Now consider k 1 Enter your final answer a comma separated list 72 3 52...

Basic Math
Q

1 Fill in the missing values for the weekly time card Mon Tues IN 8...

Algebra
Q

Please solve for 8,9, & 10. Drives -n-More Manufacturing manufactures 256GB SD cards (memory...

Accounting
Q

Assume that total assets reported at August 31, 2023, were $76,900. Determine what total liabilities...

Accounting
Q

ABC Audio sells headphones and would like to earn an after-tax profit of $400 every...

Accounting
Q

Record the following transaction in the appropriate journals from April 1-April 15. I Really need...

Accounting
Q

Utilizing the financial statements contained in the General Electric's 2022 annual report, create a vertical...

Accounting
Q

The following section is taken from Gordon Corp. 's balance sheet at December 31, 2020....

Accounting
Q

underline

Accounting
Q

Calculate Company Y's total asset turnover based on the following information for the current year:...

Accounting
Q

1. Dar el efecto de la condonacin o remisin de una deuda por uno de...

Accounting