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Stock Valuation in an Efficient Market for Natsam Corporations

Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $15 per share. Natsam's board has decided to pay out this cash as a one-time dividend.

a. What is the ex-dividend price of a share in a perfect capital market?
b. If the board instead decided to use the cash to do a one-time share repurchase, in a perfect capital market what is the price of the shares once the repurchase is complete?
c. In a perfect capital market, which policy (in part a or b) makes investors in the firm better off?

Solution Preview

a. The amount of dividend that is paid per share = Total Amount/Number of shares = $250 million/500 million shares = $0.50
After the dividend the price will fall by the dividend amount. The ex dividend price ...

Solution Summary

The solution explains the three questions, including calculations, relating to dividends and share repurchase in 152 words.