The net income of the year that just ended, prior to paying a dividend, for Novis Corporation is $32,000. They have 10,000 outstanding shares and a 100% payout policy. They are funded with 100% equity. The expected value of the firm in one year is $1,545,600. Their required return on equity is 12%.
1. What is the value of the firm now, prior to a payout?
2. What is the ex-dividend price of a share of stock if the firm follows the current dividend strategy?
3. At their annual meeting where they declare the dividend, several board members argue that the dividend should be higher. They propose selling enough shares to finance a $4.25 dividend per share. Is the current dividend currently depressing the stock price? If the new policy is adopted, at what price will the new shares sell and how many will need to be sold to fund the increase?