(Dividend irrelevance of the timing of cash dividends) The Caraway Seed Company sells specialty gardening seeds and products primarily to mail-order and Internet customers. The firm has $ 200 comma 000 available for distribution as a cash dividend immediately and plans to shut down its business at the end of one year, at which time it will be prepared to pay a liquidating dividend of $1.20 million to the firm's stockholders. The firm's shareholders require a 10.0 percent rate of return for investing in the all-equity-financed firm.
A. What do you estimate the value of Caraway's equity to be today if it pays out a $200 comma 000 cash dividend today and plans to pay a $1.20 million liquidating dividend at the end of the year?
B. If Caraway's board of directors decides to pay a $600 comma 000 dividend today to its existing shareholders using an equity offering selling new shares of common stock to raise the additional $400 comma 000 it needs to make the cash dividend, what will be the value of the existing shares of stock? The new shares?