1. A firm is considering two different financing capital structures (CS1 and CS2). In the first capital structure CS1 the firm will issue equity which will pay expected dividends of $2 million every year perpetually, and debt of maturity 10 years that will pay expected coupons of $3 million annually (6% of face value of $50 million). The equity is discounted at a rate of 9.38% annually, and the debt is discounted a rate of 6% annually. In the second capital structure the firm will issue equity which will pay expected dividends of $4 million every year perpetually, and debt of maturity 10 years that will pay coupons of $1 million annually (8% of face value of $12.5 million). The debt is discounted a rate of 8% annually. What is the rate of discount for equity in CS2? Assume that Modigliani-Miller and its assumptions are true. Round the answer to two decimals in percentage form.
2. A firm has 1,000,000 shares outstanding with a price per share of $20.02 (previous to any dividend payment). It decides to pay out cash dividend of $4,000,000. What will the share price be after the dividend has been paid? Assume that Modigliani-Miller and its assumptions are true.