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Essay Details:
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Essay text:
It is the ex-dividend (post time 1 dividend) value of the firm’s equity at time 1. This amount ($2,200) is the same under policies I and II because the firm’s assets and financial structure are exactly the same under I and II (implying the same time 1 total value of all the equity outstanding at time 1). We assume that the buyers of the new time 1 stock pay a fair price for the stock.
Dividend policy
(1)
Time 1 dividend
(2)
Time 1 total equity value (time 0 shares + new time 1 shares)
(3)
Time 1 value of new time 1 shares
(4) Time 1 value of old time 0 shares
[= (3) ? (4)]
(5)
I $110 $2,200 0 $2,200
II $121 $2,200 $11 $2,189
Now let’s compute the time 0 value of the Carter stock if Carter announces policy I, and if it announces policy II...
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Common topics in this essay:
- Dividend Policy
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