Grove is a quoted company that has a dividend yield of 7%. The present share price is £1.40. The directors has announced a one for ten scrip issue and they have made it clear that the dividend per share will not be reduced as a result of the issue. What is the expected value of the shares under these circumstances? A. £1.27 B. £1.36 C. £1.40 D. £1.54 The Answer is C. I am not getting how to solve it and where to use the dividend yield. I solved it this way: [(1.40×10+0)/11]= 1.27 Why it is wrong? Please anyone help. Thank you.
Hi A (£1.27, as you've calculated it) does seem like a plausible answer. It would be the usual expected result of such a scrip issue (where the fundamental value of the company is assumed unchanged and so theoretically the price per share should fall in proportion to the increase in the number of shares). However, the examiners are using the fact that the directors have 'made it clear that the dividend per share will not be reduced as a result of the issue' to say that the value of a share will not be reduced (as we can consider the value of a share to be the value of a stream of future dividends). Unchanged share price = C.
