Question

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

$

Answer 1

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