From the first equation:
) + (N
) = $21,000,000
Substituting from the second equation:
) + $1,000,000 = $21,000,000
so that P
equal to $20, and $1,000,000 to raise, the firm will sell 50,000 new
The expected dividends paid at t = 2 are $1,050,000, increasing by 5% in
each subsequent year.
With 1,050,000 shares outstanding, dividends per
share are: $1 at t = 2, increasing by 5% in each subsequent year.
total dividends paid to old shareholders are: $1,000,000 at t = 2,
increasing by 5% in each subsequent year.
For the current shareholders:
From Question 3, the fair issue price is $20 per share.
If these shares are
instead issued at $10 per share, then the new shareholders are getting a bargain,
i.e., the new shareholders win and the old shareholders lose.
As pointed out in the text, any increase in cash dividend must be offset by a
stock issue if the firm’s investment and borrowing policies are to be held constant.
If this stock issue cannot be made at a fair price, then shareholders are clearly
not indifferent to dividend policy.
Since both dividends and capital gains are not taxable, the share price will
decrease by the amount of the dividend, HK$5.
The share price will not be affected.
The value is unaffected by whether
the firm issues a dividend or uses the equivalent amount of cash to