Question

Natsam Corporation has

$210

million of excess cash. The firm has no debt and

472

million shares outstanding with a current market price of

$13

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

a)Calculation of ex-dividend price of a share in a perfect capital​ market

In a perfect capital market,share price reflect all the available information,thus exdividend price will be account for dividend as follow;

Dividend Per Share=Available Cash/No. of shares outstanding

=$210 million/472 million

=$0.445 per share

Ex-dividend price per share=current market price-dividend per share

=$13-$0.445

=$12.555 or $12.56

b)Share price after repurchase will same as before repurchase that is $13 per share

c)Investor is better off in both option as the investor receive same amount in both option.Thus both,a and b are same.