Problem
Consolidated pasta is currently expected to pay annual didvends of 10 a share in perpetuity on the 2.3 million shares that are outstanding. shareholders require a 10% rate of return from consolidated stock
• What is the price of consolidated stock?
• What is the total market value of its equity?
• Consolidated now decides to increase next year's dividend to 20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing 10 million a year.
• How much new equity capital will the company need to raise to finance the extra dividend payment?
• What will be total present value of Dividends paid each year on the new shares that the company will need to issue?
• What will be the transfer of value from old shareholders to the new shareholders?