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Cash Dividend, Stock Repurchase, Stock Dividend

8.Cash Dividend-The stock of Payout Corp. Will go ex-dividend tomorrow. The dividend will be $0.50 per share, and there are 20,000 shares of staock outstanding. The market-value balance sheet for Payout is shown below
a.What price is Payout selling today.
b. What price will it sell for tomorrow? Ignore taxes

Assets Liabilities and Equity
Cash $100,000 equity $100,000
Fixed Assets 900,000

9.Repurchases. Now suppose that Payout from problem 8 announces its intention to repurchase $10,000 worth of stock instead of paying out the dividend.
a. What effect will the repurchase have on an investor who currently holds 100 shares and sell 1 of those shared back to the company in the repurchase?
b. Compare the effect pf the repurchase to the effects of the cash dividend that worked out in problem 8

10.Stock Dividend. Now suppose that Payout ratio again changed its mind and decides to issue a 1 percent stock dividend instead of either issuing the cash dividend or repurchasing 1 percent of the outstanding stock. How would this action affect a shareholder who owns 100 shares of stock? Compare answers to problem 8 and 9

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"8.Cash Dividend-The stock of Payout Corp. Will go ex-dividend tomorrow. The dividend will be $0.50 per share, and there are 20,000 shares of staock outstanding. The market-value balance sheet for Payout is shown below
Assets Liabilities and Equity
Cash $100,000 equity $100,000
Fixed Assets 900,000

"

Assets Liabilities and equity

Cash $100,000 Equity $1,000,000
Fixed Assets 900,000
1,000,000 1,000,000

(Note you have given the value of equity as $100,000 but there are no liabilities and for the balance sheet to balance, the value of equity should be $1,000,000)

a.What price is Payout selling today.

Value of equity= $1,000,000
Number of shares outstanding= 20,000

Therefore, price of share today= $50 =1000000/20000

b. What price will it sell for tomorrow? Ignore taxes

Dividend per share= $0.50
Therefore, price of the share tomorrow= $49.50 =50-0.5

9.Repurchases. Now ...

Solution Summary

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