The stock of Payout Corp. will go ex-dividend tomorrow. The dividend will be $2 per share, and there are 15,000 shares of stock outstanding. The market-value balance sheet for Payout is shown below. |
Assets | Liabilities and Equity | ||
Cash | $50,000 | Equity | $1,200,000 |
Fixed assets | 1,150,000 | ||
So far, price of the share today is $80 per share and it will sell at $78 per share for tomorrow. |
Now suppose that Payout announces its intention to repurchase $15,000 worth of stock instead of paying out the dividend. (Round your answers to the nearest cent.) |
a. | What effect will the repurchase have on an investor who currently holds 160 shares and sells 4 of those shares back to the company in the repurchase? |
Total value of the position | $ |
b. | What effect will the initial cash dividend payment have on the same investor? |
Total value of the position | $ |
a) What effect will the repurchase have on an investor who currently holds 160 shares and sells 4 of those shares back to the company in the repurchase?
Ans. Since no dividend is announced now and share buyback program is introduced, therefore share market value will remain at $80.
So investor will have 156 shares of $ 80 value, which is equal to $ 12,480 (total value of outstanding shares) and cash equivalent to 4 * 80, which is equal to 320 $.
Total value of position : 12480 + 320 = $12,800
b) What effect will the initial cash dividend payment have on the same investor?
Ans. Since dividend is paid, so share will trade at ex dividend value of $ 78 a share.
So investor will have 160 shares of $ 78 value, which is equal to $ 12,480 (total value of outstanding shares) and cash equivalent of dividend (160 * 2), which is equal to 320 $.
Total value of position : 12480 + 320 = $12,800
Get Answers For Free
Most questions answered within 1 hours.