Saskatchewan Fine Jewellery (SFI) is expected to earn $180,000 per year for the next two years. The
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- Saskatchewan Fine Jewellery (SFI) is expected to earn $180,000 per year for the next two years. The firm will be liquidated at the end of Year 2 but no cash proceeds will be generated from the liquidation. The firm’s investors require 15% return. Management is considering what to do with the cash that will be generated at the end of the first year. It can pay the entire earnings in dividends (100% dividend payout policy). Alternatively, it can pay 40% in dividends (40% payout policy) and reinvest the remaining amount in a project code named JX. Project JX is expected to generate 16% return at the end of its first year of operation after which JX will be sold, and the initial investment will be fully recovered (also 1 year after acquiring JX).
- a) What will be the firm’s value under the 100% dividend payout? (4 marks)
- b) SFI has 20,000 shares outstanding. John is a retired teacher and owns 10% of SFI. He relies on dividends from SFI for spending. He prefers the 100% dividend policy. What would be John’s share of dividends under the 100% dividend policy? (3 marks)
- c) What will be the firm’s value under the 40% dividend policy? (6 marks)
- d) Management decides to adopt the 40% dividend policy and invest in JX. What would be SFI’s share price at the end of Year 1 immediately after paying the 40% of Year 1’s cash flows as dividends? (7 marks)
- e) Under the 40% dividend policy, how many shares John must sell immediately after receiving his Year 1’s dividends to obtain his target spending income from SFI? (5 marks)
Related Book For
Financial Management for Public Health and Not for Profit Organizations
ISBN: 978-0132805667
4th edition
Authors: Steven A. Finkler, Thad Calabrese
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