Stock Valuation in an Efficient Market for Natsam Corporations
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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?
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Solution Summary
The solution explains the three questions, including calculations, relating to dividends and share repurchase in 152 words.
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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 ...
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