Northern Arizona Let Rocksteady Industries Stock Price & Total Value


Let Rocksteady Industries be an all-equity firm in a Modigliani-Miller world with 500 shares outstanding
and a cost of equity of rE = 0.15. Suppose that it has announced a dividend of 12 per share equal to its
expected annual earnings.

  1. (a) (5) Calculate the stock price and total value of the firm.
  2. (b) (5) Suppose that Rocksteady realizes lower than expected of earnings of 3, 000, but does not expect this
    to impact its future cash flows. It does not want to reduce its dividend, and decides to issue new shares
    to make up the difference. How many new shares will be issued and at what price? What is the payoff to
    existing shareholders?
  3. (c) (5) Suppose that Debbie owns 100 shares and disagrees with the firm’s policy of maintaining a dividend
    of 12, preferring instead to receive a lower payout than have her shares diluted. What could she do to
    achieve her desired outcome?
  4. (d) (5) Now suppose that Rocksteady instead realizes higher than expected earnings of 9, 000. It decides to
    keep the dividend at 12 and use the remainder to buy back shares. How many shares will be repurchased
    and at what price? What is the payoff to the remaining shareholders?
  5. (e) (5) Once again, Debbie is dissatisfied by the firm’s policy and would have preferred a proportionally
    higher dividend to the buyback. How many shares should she sell back to the firm to replicate her desired

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