Valuation Models
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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.
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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 ...
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