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Stock Value for Herring Inc.

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Here are key financial data for House of Herring, Inc:

Earnings per share for 2015: $5.50
Number of shares outstanding: 40 Million
Target payout ratio: 50%
Planned dividend per share: $2.75
Stock price, year-end 2015: $130

House of Herring plans to pay the entire dividend early in January 2015. All corporate and personal income taxes were repealed in 2015.

(a)

Other things equal, what will be House of Herring's stock price after the planned dividend payment?

(b)

Suppose the company cancels the dividend and announces that it will use the money saved to repurchase shares. What happens to the stock price on the announcement date? Assume that investors learn nothing about the company's prospects from the announcement. How many shares will the company need to repurchase?

(c)

Suppose the company increases dividends to $5.50 per share and then issues new shares to recoup the extra cash paid out as dividends. What happens to the with- and ex-dividend share prices? How many shares will need to be issued? Again, assume investors learn nothing from the announcement about House of Herring's prospects.

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The solution determines the stock value for Herring Inc.

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(a) Other things equal, what will be House of Herring's stock price after the planned dividend payment?

$127.25.

(b) Suppose the company cancels the dividend and announces that it will use the money saved to repurchase shares. What happens to the stock price on the announcement ...

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