The net income of Steel City Corporation is $130,000. The company has 30,000 outstanding shares, and a 100 percent payout policy. The expected value of the firm one year from now is $2.43 million. The appropriate discount rate is 11 percent, and there are no taxes.

a. What is the current value of the company assuming the current dividend has not yet been paid?

b. What is the ex-dividend price of the company’s stock if the board follows its current policy?

c. At the dividend declaration meeting, several board members claimed that the dividend is too meager and is probably depressing the company’s stock price. They proposed that the company sell enough new shares to finance a dividend of $5.40.

i. Comment on the claim that the low dividend is depressing the stock price. Support your argument with calculations.

ii. If the proposal is adopted, at what price will the new shares sell and how many shares will be sold?