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WinSome Inc. has two million shares outstanding and its current assets generate earnings of $2M forever, including the current year. The company wants to launch a new product this year, which will cost $1M initially and generate earnings of $0.5M forever. The firm pays out all its cash, except when it needs to use funds for investment. The cost of capital is 15%.
0 
1 
2 
3… 

Earnings from current assets 
$2M 
$2M 
$2M 
$2M… 
Earnings from project 
$1M 
$0.5M 
$0.5M 
$0.5M… 
Total Payout 
$1M 
$2.5M 
$2.5M 
$2.5M… 
a) What is the stock price of WinSome today (at year 0)?
b1) WinSome wants to pay a special dividend of $0.5 per share this year. It will issue new equity to fund the payout. New shareholders don’t get any dividends in year 0. How many shares will the company issue?
b2) At what price?
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