Exercise 2: Debt, equity financing and payout decisions (25 marks)

1. AlphaTauri Corp. is making good profits, even though growth and revenues are slowing down. Recently you have been invited to the board meeting where the 2 main points on the agenda are the following:

• 1) So far, the company has not paid out dividends to its shareholders; however, the CFO wants to start paying dividends to make the company more attractive to potential investors.
• 2) To decide whether the company should issue new stocks or write new bonds to finance an outstanding project that is expected to be profitable in the future and has strong support among board members.

Analyze and discuss both points from above and address the following: 1) what questions should the CFO address in order to decide on a possible dividend payment and whether the decision to do so would make the shares more attractive to potential investors, and 2) to what extent should the firm consider using debt rather than equity financing? (12 marks)

2. After the board meeting it has been decided to pay a cash dividend of $2 (T₀). For the dividend payment, the company used all its earnings in 2019. The business outlook is stable. Currently, there are 14,250,000 outstanding shares at $42.83 per share (T₀). In 2020, the company expects profits for the year to approximately equal the amount of dividends paid. The CFO is considering switching from cash dividends to repurchases for 2020. Calculate and compare the stock price for the old and the new policy for next year (T₁). (6 marks)

Do the necessary calculations and fill-in the following table:

	New Policy			Old Policy
	Shares outstanding	Shares Repurchased	Share Price	Share Price
T0
T1

. AlphaTauri Corp. needs new equity for the new project. The current market price per share is $42.83. The company decides to raise additional funds by offering the right to buy 3 new shares for every 20 currently owned at $20.20 per share. With 100% subscription, what is value of each right to buy?