Question

After more than 40 years of operation, the Tyler Brick Mfg. Company has decided it is time to shut down the business. The firm has $125,000 available for distribution as a cash dividend immediately and plans to shut down its business at the end of one year, at which time it will be prepared to pay a liquidating dividend to the firm’s stockholders of $14 million. The firm’s shareholders require a 15 percent rate of return for investing in the all-equity-financed firm.
a. What do you estimate the value of Tyler’s equity to be today if it pays out a $125,000 cash dividend today and plans to pay out a $14 million liquidating dividend at the end of the year?
b. If Tyler’s board of directors decides to pay a $1,000,000 dividend today to its existing shareholders and uses an equity offering selling new shares of common stock to raise the additional funds that it needs to make the cash dividend, what will be the value of the existing shares of stock? The new shares?



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  • CreatedOctober 31, 2014
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