CGC Company is considering its dividend policy. Currently CGC pays no dividends, has cash flows from operations of $10 million per year (perpetual), and needs $8 million for capital expenditures. The firm has no debt and there is no tax. The firm has 2 million shares out-standing, which are currently trading at $50 per share. George, the majority owner of CGC (he owns 60 percent), would like to take $20 million out of the company to fund his various charities. You have been hired by CGC to consider different alternatives.
a. George could sell stock to the market to raise the $20 million he requires. What are the advantages and disadvantages of this strategy (i.e., the impact on the value of CGC and George’s control)?
b. CGC could pay a dividend so that George receives the $20 million.
i. Describe how the company can issue stock to create the dividend.
ii. What is the effect on the value of CGC and on George’s control of the firm?

  • CreatedFebruary 25, 2015
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