Question

1. A company’s assets have a total market value of €400 mil. of which €40 mil....

1. A company’s assets have a total market value of €400 mil. of which €40 mil. are cash. The Company’s debt amounts to €100 mil. The company has 5 million shares.
a. What is the share price of the company?
b. If the company pays out €40 mil. of dividend, what will be the share price after the dividend payment?

c. Rather than distributing cash dividend, the company repurchases stocks worth €40 mil. What will be share price after the repurchase program?
d. What will the company’s new market debt-equity ratio be after either transaction?

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Homework Answers

Answer #1

1.Value of Equity = Total market Value of Assets - Total Debt

Value of Equity = 400-100 = 300

Share Price = 300 / 5 = 60 per share

2. If company pays out 40million dividend

Total Assets = 400 - dividend = 400-40 = 360

Value of Equity = Total Assets - Total debt

Value of Equity = 360 - 100 = 260

Share Price = 260 / 5 = 52

Debt / Equity = 100 / 260 = 0.38

3. Number of shares repurchased = 40000000 / 60 = 666667

Remaining Shares = 5000000 - 666667 = 4333333 or 4.33 million

Total Assets = 400 - Repurchase = 400-40 = 360

Value of Equity = Total Assets - Total debt

Value of Equity = 360 - 100 = 260

Value per share = 260 / 4.33 = 60

Debt / Equity = 100 / 260 = 0.38

4. Debt to Equity will remain same in both the cases ie 100/260 = 0.38

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