The Caraway Seed Company sells specialty gardening seeds and products primarily to? mail-order and Internet customers. The firm has $203,000 available for distribution as a cash dividend immediately and plans to shut down its business at the end of one? year, at which time it will be prepared to pay a liquidating dividend of $1.23 million to the? firm's shareholders. The? firm's shareholders require a 9.6?% rate of return for investing in the? all-equity-financed firm.
a. What do you estimate the value of? Caraway's equity to be today if it pays out a $203,000 cash dividend today and plans to pay a $1.23million liquidating dividend at the end of the? year?
b. If? Caraway's board of directors decides to pay a $611,000 dividend today to its existing shareholders using an equity offering selling new ordinary shares to raise the additional $408,000 it needs to make the cash? dividend, what will be the value of the existing? shares? Of the new? shares?