Company A is currently financed entirely by 1 million ordinary shares with a nominal value of 0.75
per share which were issued at par. The dividend paid by Company A have remained constant at 150 000 per annum and the market generally believes that the dividend will continue at this level indefinitely, given the information presently available. The current dividend of Company A is about to be declared and the current market price is 1.40.
The company has recently signed a contract to service factory equipment for an annual fee of 80 000 receivable in advance. The first annual fee has just been received. The contract which is to commence immediately, will entail the annual purchase of specialized materials costing 22 400 payable at the end of each year and will incur no other incremental costs. The contract will continue indefinitely and will have the same risk as the existing operators of Company A. No details of the contract have been communicated or leaked to the stock market.
You may assume for calculation purpose only that there is no time delay between the dates of declaration and the payment of the dividend.
a. Estimate the cum div market value of Company A when the details of the contract are not communicated to the market and the dividends are declared to be 150 000.
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