House of Haddock has 5,000 shares outstanding and the stock price is $100. The company is expected

Question:

House of Haddock has 5,000 shares outstanding and the stock price is $100. The company is expected to pay a dividend of $20 per share next year, and thereafter, the dividend is expected to grow indefinitely by 5% a year. The president, George Mullet, now makes a surprise announcement: He says that the company will henceforth distribute half the cash in the form of dividends and the remainder will be used to repurchase stock.

a. What should be the total value of the company before the announcement?

b. What should be the total value after the announcement?

c. What must be the expected rate of return on equity?

d. What is the new growth rate in the dividend stream?

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...

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