payout probelm 17
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payoutTRANSCRIPT
Questions-and-answers-modifiedQuestion 17:
MV of Little Oil ($m)20No.of shares (millions)1Price20Expected dividends ($m)1Expected growth 5%
Planned dividends ($ millions)012345Orginal 11.051.10251.1576251.21550625Revised21.051.10251.1576251.21550625
p = D1/(ke-g)ke from the above10.0%Share price next year21Return to investorDiv.1CG1Total gains (10% rate of return)2
(a)At what price will new shares be issued next year
Required extra amount (millions)1Firm value after the payout21PV of cash flows starting with $1.05 growing at 5%Share price with additional issue:Total number of shares:1+NTotal value to be shared21Price per share21=p*(1+N), however, p* x N = $ 1m the targeted amount 21=p*+p*N21=p*+1Hence the price per share is ($)20
(b)How may shares would be issued?
No. of shares to be issued 50000=1 million/20No. of shares to be issued (millions)0.05Total number of shares1.05
(c)Dividend payout on the old and new shares
Dividend and valuations after the share issue:
t012345E(CF) old 11.051.10251.1576251.21550625No. of shares existing (million)11111DPS-existing 11.051.10251.1576251.21550625
Dividend to existing shares:No. of shares revised (million)11.051.051.051.05DPS-revised211.051.10251.157625Price existing PV of additional $1, but delayed gorwth streamExtra $2 after one-year1.82Diff. in value of the delayed PV stream-1.82=1/1.05 x 1/1.1 - 1/1.05 = 20/1.1 - 20Hence, gain = lossNew shareholders price20=1/5%