Question

The net income of Zippy Corporation is $93,000. The company has 30,000 outstanding shares and a 100 percent payout policy. The expected value of the firm one year from now is $1,795,000. The appropriate discount rate for the company is 12 percent and the dividend tax rate is zero.

a. What is the current value of the firm assuming the current dividend has not yet been
paid? (Do not round intermediate calculations and round your answer to 2 decimal
places, e.g., 32.16.)
b. What is the ex-dividend price of the company's stock if the board follows its current
policy? (Do not round intermediate calculations and round your answer to 2
decimal places, e.g., 32.16.)

Answer 1

The current value of the firm is $1,602,678.57. The ex-dividend price of the company's stock is $1,509,678.57.

Step-by-step explanation:

To calculate the current value of the firm, we need to find the present value of future expected cash flows. The formula for present value is: PV = CF1 / (1+r)^1 + CF2 / (1+r)^2 + ... + CFn / (1+r)^n, where PV is the present value, CF is the cash flow, r is the discount rate, and n is the number of periods. In this case, the cash flow is the expected value of the firm one year from now, which is $1,795,000. The number of periods is 1. The discount rate is 12%. Plugging in these values into the formula, we get: PV = 1,795,000 / (1+0.12)^1 = 1,602,678.57. Therefore, the current value of the firm is approximately $1,602,678.57.

To calculate the ex-dividend price of the company's stock, we need to subtract the dividend from the current value of the firm. The dividend is the net income of $93,000. So, the ex-dividend price of the stock is: Ex-dividend price = Current value of the firm - Dividend = 1,602,678.57 - 93,000 = 1,509,678.57. Therefore, the ex-dividend price of the company's stock is approximately $1,509,678.57.