Need help with D Below: Consolidated Pasta is currently expected to pay annual d
ID: 2738751 • Letter: N
Question
Need help with 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 ? 27 Million
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
d. Present Value of Perpetuity = Fixed Payment / Interest Rate
= $10 / 0.10 = $100
For 2.7 million Shares outstanding total present value of dividend paid = 207 million
For one year; present value will be 10 (1 + 0.10) = $11 x 2.70 = 29.70 million