Need help with C & D Below : Consolidated Pasta is currently expected to pay ann
ID: 2738660 • Letter: N
Question
Need help with C & D Below:
Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 2.7 million shares that are outstanding. Shareholders require a 10% rate of return from Consolidated stock.
a. What is the price of Consolidated stock? Stock price $ 100
b. What is the total market value of its equity? (Enter your answer in millions.) Market value of equity $ 270 million
Consolidated now decides to increase next year’s dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year.
c. How much new equity capital will the company need to raise to finance the extra dividend payment? (Enter your answer in millions.) New equity ?
d. What will be the total present value of dividends paid each year on the new shares that the company will need to issue? (Enter your answer in millions.) Present value ?
Explanation / Answer
c)
Extra dividend payment:
= $10×2,700,000
= $27,000,000
New equity to be issued:
= $27,000,000/$100
= 270,000 shares or $27,000,000
d)
Present value of dividends:
= 270,000×$10÷10%
= $27 Million