question archive House of Haddock has 5,050 shares outstanding and the stock price is $145
House of Haddock has 5,050 shares outstanding and the stock price is $145
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House of Haddock has 5,050 shares outstanding and the stock price is $145. The company is expected to pay a dividend of $25 per share next year and thereafter the dividend is expected to grow indefinitely by 2% a year. The President, George Mullet, now makes a surprise announcement: He says that the company will henceforth distribute half the cash in the form of dividends and the remainder will be used to repurchase stock. The repurchased stock will not be entitled to the dividend. a-1. What is the total value of the company before the announcement? Total value $ a-2. What is the total value of the company after the announcement? Total value a-3. What is the value of one share? Value per share b. What is the expected stream of dividends per share for an investor who plans to retain his shares rather than sell them back to the company? Check your estimate of share value by discounting this stream of dividends per share. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Year 1 Expected Dividend $ 2 $
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Using the Gordon Growth Model
145= 20/(r-0.02)
r = 0.1579
So at 145 per share total value of company is:
$145 per share * 5,050 shares=$732,250
If the dividend growth rate cut to 1%
P= 20/ (0.1579 -0.01) = $135.22 per share
So the value of the company is now
$135.22 per share * 5,050 shares = $682,861
