Question

Caspian Sea Drinks needs to raise $42.00 million by issuing additional shares of stock. If the market estimates CSD will pay a dividend of $1.21 next year, which will grow at 4.10% forever and the cost of equity to be 10.61%, then how many shares of stock must CSD sell?

Answer 1

Caspian Sea Drinks needs to sell approximately 2,258,206 shares at $18.59 each to raise the desired $42 million, calculated using the Gordon Growth Model.

Step-by-step explanation:

To determine how many shares of stock Caspian Sea Drinks (CSD) must sell to raise $42.00 million, we use the Gordon Growth Model which assumes a perpetual growth rate in dividends. The model calculates the price per share as follows:

Price per share = D1 / (r - g)

Where D1 is the expected dividend next year, r is the cost of equity, and g is the perpetual growth rate of dividends.

Given that D1 is $1.21, r is 10.61%, and g is 4.10%, we can calculate the price per share:

Price per share = $1.21 / (0.1061 - 0.0410) = $1.21 / 0.0651 ≈ $18.59

To raise $42 million, the number of shares that must be sold is:

Number of shares = Total funds needed / Price per share

Number of shares = $42,000,000 / $18.59 ≈ 2,258,206 shares

CSD will need to sell approximately 2,258,206 shares to raise the required capital.