Newcastle auto plc has a current cash flow of 4.4 million and pays no dividends. The Present value of the company ´s future cash flows is 74 million. The company is entirely financed with equity and has 800.000 shares outstanding. Assume the dividend tax is zero.
Question 1. What is the share price of the Newcastle Auto´s equity?
Question 2. Suppose the board of directors of Newcastle Autos announces it´s plan to pay out 60% of it´s current cash flow as cash dividends to it´s shareholders. How could you achieve a zero payout policy on your own, if you own 1.000 shares of Newcastle Autos equity?
Question 1: To calculate the share price of Newcastle Auto's equity, we need to divide the present value of the company's future cash flows by the number of shares outstanding.
Share price = Present value of future cash flows / Number of shares outstanding
In this case, the present value of the company's future cash flows is given as 74 million, and there are 800,000 shares outstanding.
Share price = 74,000,000 / 800,000
Share price = 92.5
Therefore, the share price of Newcastle Auto's equity is 92.5.
Question 2: To achieve a zero payout policy on your own if you own 1,000 shares of Newcastle Auto's equity, you can reinvest the dividends received from the company back into purchasing additional shares.
In this case, if the board of directors announces a plan to pay out 60% of the current cash flow as cash dividends, you would receive a dividend based on your share ownership. Since the current cash flow is stated as 4.4 million, the dividend per share would be:
Dividend per share = (60% * current cash flow) / Number of shares outstanding
Dividend per share = (60% * 4,400,000) / 800,000
Dividend per share = 3.3
Thus, with 1,000 shares, you would receive a dividend of 3.3 * 1,000 = 3,300.
To achieve a zero payout policy, you can take this dividend and reinvest it by purchasing additional shares of Newcastle Auto's equity. This way, you are effectively reinvesting the dividend back into the company and not receiving any cash payout.