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Consider an all-equity firm, that pays no taxes, with n=100 shares outstanding and a cost of equity rE=10%. The firm will be liquidated at t=2.

Consider an all-equity firm, that pays no taxes, with n=100 shares outstanding and a cost of equity rE=10%. The firm will be liquidated at t=2. The total cash flows, including the proceeds from liquidation, are $10,000 in each of the next two years. The firm is considering three alternative dividend policies. What is the share price today, P0, under each policy?



1.All cash flow each year is paid out as dividends.

2.A higher dividend ($110 per share) will be paid in year 1 by selling new shares in year 1.

3.A lower dividend ($90 per share) will be paid in year 1, with the remaining cash flow retained by the firm.

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