Question

Cisco Systems has at this moment 10 million shares outstanding and the following market-value balance sheet:

Balance Sheet (Market Values, $ Million)
Surplus cash	50.0	Debt	0
Net Working Capital & Assets	500.0	Equity	550.0
	$550.0		$550.0

Assuming that neither the firm nor its investors pay taxes, answer the following questions:

I) What is Cisco's current share price?

II) If Cisco now sells a patent that it previously thought was worthless and is paid $20 million in cash, and its (market value) surplus cash rises to $70.0 million, what is Cisco's new share price?

III) If Cisco decides to pay out all its surplus cash ($70.0 million) as a cash dividend, what is Cisco's ex-dividend share price?

IV) If the firm pays out all its surplus cash ($70.0 million) through an offer to repurchase shares at the fair market value per share, what is Cisco's post-offer share price?

a.

I) $57; II) $52; III) $50; IV) $52

b.

I) $55; II) $57; III) $50; IV) $57

c.

I) $55; II) $55; III) $48; IV) $55

d.

I) $50; II) $52; III) $50; IV) $50

Answer 1

I) Cisco's current share price = Market value of Equity / no. of shares = $550 million / 10 million = $55

II) Cash and equity both increase by $20 million.

Share price = $570 million / 10 million = $57

III) Ex-dividend price means share price after the firm pays out its dividends. After paying dividends of $70 million, the equity will reduce by $70 million to $500 million.

Share price = $500 million / 10 million = $50

IV) Post repurchase price will remain the same.

Pre repurchase price = $57

No. of shares repurchased = $70 million / $57 = 1.22807017543

No. of shares remaining = 10 - 1.22807017543 = 8.7719298246

Post repurchase price = Post repurchase Equity / post repurchase no. of shares = ($570 - $70) million / 8.7719298246 = $57

Therefore, Option B is correct.