The Caraway Seed Company sells specialty gardening seeds and products primarily to mail-order and Internet customers. The

Question:

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?

Common Stock
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The word "distribution" has several meanings in the financial world, most of them pertaining to the payment of assets from a fund, account, or individual security to an investor or beneficiary. Retirement account distributions are among the most... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...