(Cash versus homemade dividends) A firm currently has 8,000 shares outstanding that are worth $100 each. The firm's shareholders desire a dividient of $20 per share. Assume a perfect capital market.
a. Suppose the firms pays a divident of $20 per share and sells new shares to raise $160,000 to replace the cash it paid out. Show that these steps do not alter the wealth of the original shareholders. What percentage of the firm do the original shareholders end up owning?

b. Suppose instead the shareholders raise $160,000 by selling some of their own shares. How many shares must they sell? Show that the two dividend alternatives leave them equally well-off.

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