1. The following data can be used for answering the question:
a. A firm currently has no debt.
b. Its current market price of the stock is $10 per share with the outstanding shares of 100,000. The market price already incorporated the firm’s plan to pay cash dividend of $0.9 per share and stock dividend of 5% at the end of the year.
c. The required return for the equity is 15%.
d. The earning is expected as $200,000 at the end of the year.
e. An investment in a project costing $211,000 is planned. The short fall of the investment money will be raised by issuing new shares.

What will be the value of the firm after the cash dividend payment?
P0 = (d1 + P1)/(1+ke), 10 = (0.9+P1)/1.15, P1 = 10.6 (After cash dividend paid)
Value after cash dividend paid = 10.6 x 100,000 = $1,060,000
What will be the price of the stock after the cash and stock dividend payments?
1,060,000 = P(After stock dividend is paid) x (100,000 x 1.05)
P(After stock dividend is paid) = $10.1
What will be the number of new shares to be issued for raising the new money? m1 x P(after stock dividend) = I – (NOI – D) m1 x 10.1 = 211,000 – (200,000 – 90,000), m1 = 10,000 shares

2. Companies A and B are essentially the same except the dividend policies.

A B Outstanding shares 10,000 10,000 Net Operating Income $20,000 $20,000 Cost of capital 15% 15% Expected stock price at t=1 $23 $23 (Before dividend payment) Cost of new investment t=1 $50,000 $50,000 Dividend pay-out ratio 50% 0%

What will be the equilibrium stock prices for both companies today (t=0)?
How many new shares have to be issued to finance the investments for both firms?
P0 = 23/1.15 = 20
A: m1xP(ex div) = I – (NOI-D) = 50,000 – (20,000 – 10,000) = 40,000 m1 = 40,000/22 = 1,818 shares
B: m1 = 30,000/23 = 1,304 shares