Explore BrainMass

Explore BrainMass

    Valuation Models

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Divido Corp. Is an all-equity financed firm with a total market value of $100 million. The company holds $10 million is cash equivalents and has $90 million in other assets. There are 1,000,000 shares of Divido common stock outstanding, each with a market price of $100. What would be the impact of Divido's stock price and on the wealth of its shareholders of each of the following decisions? Consider each decision separately.

    a. The company pays a cash dividend of $10 per share.
    b. The company repurchases 100,000 shares.
    c. The company pays a 10% stock dividend.
    d. The company has a 2-for-1 stock split.
    e. The company invests $10 million in an expansion that has an expected IRR equal to the firms's cost of capital.

    © BrainMass Inc. brainmass.com June 3, 2020, 9:07 pm ad1c9bdddf
    https://brainmass.com/business/capital-structure-and-firm-value/valuation-models-166829

    Solution Preview

    SOLUTION:

    a. The company pays a cash dividend of $10 per share.

    The stock price falls by $10, but shareholder wealth remains the same because shareholders receive $10 in cash on each share they own. In the real world, shareholder's wealth may decline because personal taxes may have to be paid on the cash dividend.

    b. The ...

    Solution Summary

    This posting provides a detailed solution to the student's question.

    $2.19

    ADVERTISEMENT