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Determine what dividend needs to be paid in three years

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Reference no: EM132419928

The equity investors of Distributors plc have an opportunity cost of capital of 20 per cent. The business makes a steady profit of £25 million each year, which is all paid out as a dividend.

The opportunity has arisen to invest the cash that is about to be paid as a dividend (£25 million). This investment will give rise to a single payoff in three years' time. The normal £25 million dividend will be paid next year and, subsequently, in the normal way.

Required:

Determine what dividend needs to be paid in three years' time so that the equity investors will be equally content to wait three years, adopting the Modigliani and Miller assumptions on dividends.

Reference no: EM132419928

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