Pay all earnings in dividends for each of the two years

Assignment Help Financial Management

Reference no: EM131577462

Metro is an all-equity firm with 1 million shares outstanding and its cost of equity is 10%. The firm will be liquidated at t=2. The total earnings including the proceeds from liquidation, are $50 million in each of the next two years. There are no taxes, transaction costs, or other market imperfections. The firm has the following two dividend policies options.

(1) Pay all earnings in dividends for each of the two years.

(2) Pay out 80% of earnings in the first year, retain and reinvest the remaining 20% of earnings in the firm at 10% and pay out all available earnings in the second year.

1. Suppose the firm chooses Policy 1, but an investor, who owns 100 shares, prefers Policy 2. What could she do to replicate her preferred dividend policy and how much would she receive in dividends at t=2 following this strategy?

2. Suppose the firm chooses Policy 2, but an investor, who owns 100 shares, prefers Policy 1. What could he do to replicate his preferred dividend policy and how much would he receive in dividends at t=2 following this strategy?

Reference no: EM131577462

Questions Cloud

The effects of war and peace on foreign aid : Use the Internet to research one (1) developing nation of your choice. Your research should include an examination of the effects that war and peace.

Bill has decided to begin investing for retirement : Bill has decided to begin investing for retirement. How much will he have in the account after 20 years?

What is the book value of klingon total assets today : Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $4.3 million. What is the book value of Klingon’s total assets today?

Generate per month to offset costs : A contractor is considering purchasing a CAT 635E scraper. How much monthly revenue must the 635E generate per month to offset the costs?

Pay all earnings in dividends for each of the two years : Metro is an all-equity firm with 1 million shares outstanding and its cost of equity is 10%. Pay all earnings in dividends for each of the two years.

Enough saved in the account to purchase new roof : In how many months would you have enough saved in the account to purchase a new roof?

What is the most you are willing to lend the borrower : Suppose you are a mortgage lender. A borrower has promised to pay you $11,746 each year for 20 years. what is the most you are willing to lend the borrower?

Amount of in six months given your required rate of return : What is the amount of the in six months given your required rate of return is 5 percent?

Decided for your tenants to contribute : You are a landlord and have decided for your tenants to contribute $1,000 a month towards rent payable.

User Account

All Pages