Question

The balance sheet for Cherry Pie Corp. is shown here in market value terms. There are 5,000 share of stock outstanding. Market Value Balance Sheet Cash $20,000 Equity $175,000 Fixed Assets 155,000 Total $175,000 Total $175,000

a. The company has declared a dividend of $1.5 per share. The stock goes ex-dividend tomorrow. Ignoring any tax effects, what is the stock selling for today? What will the ex-dividend price be?

b. Suppose Cherry Pie has announced it is going to repurchase $4,025 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be outstanding? What will the price per share be after the repurchase?

Answer 1

a.price the stock is selling for today:

equity / number of shares

=>$175,000 / 5,000 shares.

=>$35.

ex-dividend price = $35 - $1.50 dividend

=>$33.50.

b.effect on equity :

equity will reduce by $4,025.

shares outstanding :

5,000 existing shares - ($4,025/$35) shares repurchased

=>5,000 - 115 shares repurchased.

=>4,885.shares will be outstanding.

price after repurchase will be $35.(i.e existing price).

working:

price after repurchase = (175,000 - 4025) / 4885 shares

=>$35.