Question

Caspian Sea Drinks needs to raise $26.00 million by issuing additional shares of stock. If the market estimates CSD will pay a dividend of $2.46 next year, which will grow at 4.65% forever and the cost of equity to be 10.24%, then how many shares of stock must CSD sell?

Answer 1

Answer:

CSD must issue 590 775 sharesof stock

Explanation:

The market value of any firm is given by number of shares multiplied by the stock price so in this case we want $26 mil we nees number of shares the given information D1 $2.46, g 4.65% and r 10.24% will help us get the stock price in which will help in getting the exact number of shares to be issued

We will use the Gordon Growth Model to calculate the stock price

SP = D1/r -g

     =2.46/ 0.1024-0.0465

      =$44.01

Goal raise $26mil

26000000=stock price * number of share

26000000=44.01*number of shares

number of shares =26000000/44.01=590 775 shares

Explanation:

Answer 2

Answer:

The number of shares needed to raise $26 miliion will be 590909 shares.

Explanation:

To calculate the number of shares needed to raise $26 million, we first need to findout the price per share at which shares are issued. The fair value or the price per share can be caclculated using the constant growth model of the DDM approach. Thus, the price per share today will be:

P0 = 2.46 / (0.1024 - 0.0465)

P0 = $44.007 rounded off to $44

Thus, at the price of $44 per share, number of shares needed to raise $26 million will be:

No of shares = 26,000,000 / 44  = 590909.0909 rounded off to 590909 shares