7 The net income of Novis Corporation, which has 10,000 outstanding
shares and a 100-percent payout policy, is $32,000. The expected value
of the firm one year hence is
$1,545,600. The appropriate discount rate for Novis is 12 percent.
a. What is the current value of the firm?
b. What is the ex-dividend price of Novis?s stock if the board follows
its current policy?
c. At the dividend declaration meeting, several board members claimed
that the dividend
is too meager and is probably depressing Novis?s price. They proposed
that Novis sell
enough new shares to finance a $4.25 dividend.
i. Comment on the claim that the low dividend is depressing the stock
price. Support
your argument with calculations.
ii. If the proposal is adopted, at what price will the new shares sell
and how many will
be sold?


7 Bowdeen Manufacturing intends to issue callable, perpetual bonds.
The bonds are callable at $1,250. One-year interest rates are 12
percent. There is a 60-percent probability that long-term interest
rates one year from today will be 15 percent. With a 40-percent
probability, long-term interest rates will be 8 percent. To simplify
the firm?s accounting, Bowdeen would like to issue the bonds at par
($1,000). What must the coupon on the bonds be for Bowdeen to be able
to sell them at par?