The Caraway Seed Company sells specialty gardening seeds and products primarily to mail-order and Internet customers. The firm has $200,000 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 of $1.2 million to the firm’s stockholders. The firm’s shareholders require a 10 percent rate of return for investing in the all-equity-financed firm.
a. What do you estimate the value of Caraway’s equity to be today if it pays out a $200,000 cash dividend today and plans to pay a $1.2 million liquidating dividend at the end of the year?
b. If Caraway’s board of directors decides to pay a $600,000 dividend today to its existing shareholders using an equity offering selling new shares of common stock to raise the additional $400,000 it needs to make the cash dividend, what will be the value of the existing shares of stock? The new shares?

  • CreatedOctober 31, 2014
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