In this question, we will explore the irrelevance of dividendpolicy.

Suppose XYZ Inc currently has 1 million shares outstanding, andXYZ expects to make $1 million per year in perpetuity, all of whichis paid out in dividends. Assume the relevant discount rate is 10%.(Ignore taxes and transaction costs, and assume the markets areefficient.Use the DDM to value the shares)

a.What is the value of one share of XYZ Inc? (Assume the nextdividend payment is one year from today.)

b.Now assume XYZ Inc plans to change its dividend policy asfollows: the company will skip the next dividend payment andinstead it will repurchase $1 million worth of shares. In year 2,and in all subsequent years, the dividends will resume and all theincome will be paid out as dividends. What is the current shareprice under this policy? Provide an explicit calculation of theshare price given the new dividend payment stream.(Hint: Let P1 bethe share price at time 1, immediately before the share repurchase.Calculate the number of shares repurchased, and then find thedividends per share for years 2 and beyond. Discount all this backin order to find the current share price.) Do not assume theM&M proposition that the dividend policy is irrelevant.Essentially, this question is meant to prove that fact.

c.Suppose you purchase 100 shares today, and sell them 2 yearsfrom now, immediately after the year 2 dividend is paid. What isyour total profit under each dividend policy? Does this differencein profit violate the indifference of dividend policy? Expla