Home For AAT student members AQ 2013 AAT Level 4 (Level 8 in Scotland)
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Please help!!!

Khar1Khar1 Just JoinedRegistered Posts: 4
Hiya! Please help me to answer the following question. Thanks.

Starfish Corporation is a no-growth company paying a $
100-per-share annual dividend. Its cost of equity capital is 15
percent. The new president abhors the no-growth image and proposes to
halve next year's dividend to $50 per share and use the saving to
acquire another firm. The president maintains that this strategy will
boost sales, earnings, and assets. Moreover, he is confident that
after acquisition, dividends in year 2 and beyond can be increased to
$ 105 per share.

a. Do you agree that the acquisition will likely increase sales,
earnings, and assets?
b. Estimate the per share value of Starfish's stock immediately prior
to the president's proposal.
c. Estimate the per share value immediately after the proposal.
d. As an owner of Starfish, would you support the president's
proposal? Why or why not?
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