Payout Policy - House of Haddock has 5,000 shares outstanding and the stock price is $100. The company is expected to pay a dividend of $20 per share next year, and thereafter the dividend is expected to grow indefinitely by 5% per year. The President, George Mullett now makes a surprise announcement: He Says that the company will henceforth distribute half the cash in the form of dividends and the remainder will be used to repurchase stock.
A) What is the total value of the company before the announcement?
B) What is the total value after the announcement?
C) What is the value of one share before the announcement?
D) What is the new growth rate in the dividend stream? (Check your estimate of share value by discounting this stream of dividends per share)