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Dividends and Firm Value

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The net income of Novis Corporation is 32,000. The company has 10,000 outstanding shares and a 100 percent payout policy. The expected value of the firm one year from now is $1,545,600. The appropriate discount rate for Novis is 12 percent, and the dividend tax rate is zero.

A. What is the current value of the firm assuming the current dividend has not been paid?
B. What is the ex-dividend price of Novis' stock if the board follows its current policy?
C. At the dividend declaration meeting, several board members claimed that the dividend is too meager and is probably depressing Novis' price. They proposed that Novis sell enough shares to finance a $4.25 dividend.

i. Comment on the claim that the low dividend is depressing the stock price. Support your argument with calculations.

ii. If the proposal is adopted, at what price will the new shares sell? How many will be sold?

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a. Value firm today = Earnings today + PV (Value in 1 year) = 32,000 + 1,545,600 / 1.12 = 32,000 + 1,380,000 = 1,412,000

b. P cum div = 1,412,000 / 10,000 = $141.2
Dividend = 32,000 / 10,000 = $3.2
Thus P ex = P cum - Div = 141.20 - 3.20 = $138

c. With fixed investment opportunities, the dividend policy does not ...

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