RIGEL Corp
Subject:AccountingPrice: Bought3
RIGEL Corp. outstanding 6 million shares with a total market value of 600 million euros. RIGEL is expected to pay €90 million dividends next year, and thereafter the amount paid out is expected to grow by 5 per cent a year in perpetuity. Ignore taxes.
1) Suppose that RIGEL's managers believe that it is possible to increase the value of the firm by increasing the dividend and they announce that next year (t = 1) the total dividend will be increased to €180 million that the extra cash will be raised immediately by an issue fo shares. After that, year 2, 3, ... the total amount paid out each year will be as previously forecasted. Ignore taxes. New shares are issued at a fair price.
a) At what price will the new shares be issued in year 1?
b) How many shares will the firm need to issue?
c) Calculate the share price in year 1 before dividend payment.
d) Show that the present value of the cash flows to current shareholders remains €90 million.
e) Suppose now that the new shares are issued at €80:
e.1) How many shares will be issued?
e.2) Compute the ex-dividend share price at t = 1.
e.3) Compute the gain/loss of "old" shareholders after dividend payment at t = 1.
2) Suppose now that Rigel 's managers announce that they will cut the dividend to 0 at t = 1 and that they will repurchase €90 million worth of stock. Assume that shares are repurchased at a fair price.
a) How many shares will be repurchased?
b) Calculate the share price after the stock repurchase.
