Homer, Inc. is expected to pay dividends of $100 per share at the end of one year and $100 at the end of the second year. The dividend in the second year is a liquidating dividend and the ﬁrm will
Cease to exist. Investors require a 12% return on investments of this type. There are 100 shares of
Stock outstanding. The ﬁrm is considering an alternate dividend policy that will pay out $120 in
Dividends per share the ﬁrst year. Under the alternative plan, any shortfall in funds will be raised by
Selling new equity. There are no taxes, transaction costs, or other market imperfections.
What will be Homer's stock price once the alternate dividend plan is adopted?

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The Answer of Homer, Inc. is expected to pay dividends of $100 per share at the end of one year and $100 at the end of the second year. The dividend in the second year is a liquidating dividend and the ﬁrm will
Cease to exist. Investors require a 12% return on investments of this type. There are 100 shares of
Stock outstanding. The ﬁrm is considering an alternate dividend policy that will pay out $120 in
Dividends per share the ﬁrst year. Under the alternative plan, any shortfall in funds will be raised by
Selling new equity. There are no taxes, transaction costs, or other market imperfections.
What will be Homer's stock price once the alternate dividend plan is adopted?