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Stock price and dividend policy

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1. Good Values, Inc., is all-equity financed. The total market value of the firm currently is \$100,000, and there are 2,000 shares outstanding. Ignore taxes.
a. The firm has declared a \$5 per share dividend. The stock will go ex-dividend tomorrow. At what price will the stock sell today? Tomorrow?
b. Now assume that the tax rate on dividend income is 30 percent, and the tax rate on capital gains is zero. At what price will the stock sell taking account of the taxation of dividends?

2. For each of the following four groups of companies, state whether you would expect them to distribute a relatively high or low proportion of current earnings and whether you would expect them to have a relatively high or low price-earnings ratio.
a. High-risk companies.
b. Companies that have recently experienced a temporary decline in profits.
c. Companies that expect to experience a decline in profits.
d. "Growth" companies with valuable future investment opportunities.

Solution Preview

1. Good Values, Inc., is all-equity financed. The total market value of the firm currently is \$100,000, and there are 2,000 shares outstanding. Ignore taxes.
a. The firm has declared a \$5 per share dividend. The stock will go ex-dividend tomorrow. At what price will the stock sell today? Tomorrow?
Share price= Market value/No. of shares o/s
= 100000/2000= \$50 (Todays price)
Tomorrow Ex dividend= ...

Solution Summary

This explains the computation of Stock price and discusses dividend policy

\$2.49