A company is expect to pay annual dividends of $10.00 per share in perpetuity on the 1 million shares outstanding. Shareholders require a 10% rate of return on the stock.
The company decides to increase its dividend next year to $20.00 per share without changing its investment or borrowing plans. Thereafter, the company will revert to its policy of distributing $10 million in dividends per year.
1. What is the total present value of the dividends paid on the new shares?
2. What is the value of the transfer of ownership from the old shareholders to the new shareholders?