Question

g Caspian Sea Drinks needs to raise $76.00 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 4.51% forever and the cost of equity to be 12.14%, then how many shares of stock must CSD sell?

Answer 1

The number of shares of stock CSD must sell is approximately 4,791,929.

Step-by-step explanation:

To determine the number of shares of stock CSD must sell, we first calculate the current price per share using the Gordon growth model (GGM) formula as follows:

P = d1 / (r - g) ……………………………………… (1)

Where;

P = current price per share = ?

d1 = next year dividend = $1.21

r = required return or cost of equity = 12.14%, or 0.1214

g = dividend constant growth rate forever = 4.51%, or 0.0451

Substituting the values into equation (1), we have:

P = $1.21 / (0.1214 - 0.0451) = $1.21 / 0.0763 = $15.8584534731324

Approximating to 2 decimal places, we have:

P = $15.86

Amount needed to raise = $76.00 million, or $76,000,000

Therefore, the number shares that must be sold can be calculated as follows:

Number of shares that must be sold = Amount needed to raise / Current price per share = $76,000,000 / $15.86 = 4,791,929.38209332

Approximating to a whole number, we have:

Number of shares that must be issued = 4,791,929

Therefore, the number of shares of stock CSD must sell is approximately 4,791,929.