Question

Natsam Corporation has $270 million of excess cash. The firm has no debt and 480 million shares outstanding with a current market price of $20 per share.​ Natsam's board has decided to pay out this cash as a​ one-time dividend.

a. What is the​ ex-dividend price of a share in a perfect capital​ market?

b. If the board instead decided to use the cash to do a​ one-time share​ repurchase, in a perfect capital​ market, what is the price of the shares once the repurchase is​ complete?

c. In a perfect capital​ market, which policy in part ​(a​) or (b​) makes investors in the firm better​ off?

Answer 1

Solution:

a)Calculation of ex-dividend price:

In a perfect capital market,share price reflect all relevant iformation.Dividend payoff per share is:

=$270 million/$480 million

=0.5625 per share

Thus in a perfect capital​ market,the price of the share will drop by $0.5625 to $19.4375 or $19.44

b)Calculation of price of the shares after the repurchase:

Price after repurchase will remain same as before,that is $20 per share

c)In a perfect capital market,investor will get same amount under both options.Under option (a),investor will get;

=$0.5625(dividend)+$19.4375 ​​​​​​=$20

under option (b),he will get $20 as well.

Thus,both are same for Investors