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The Efficient Market Theory and Stock Valuation

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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 divided.

a. What is the ex-divided price of share?
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?

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Solution Summary

This solution employs the Efficient Market Theory to value a stock after it goes ex-dividend and to value the company after stock is repurchased in a perfect market environment.

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a. Under the Efficient Market Theory, the market has priced the amount of the expected dividend into the stock price. The expect dividend is $250,000,000/500,000,000 shares, or $.50 per share. The ex-dividend price, or price after the dividend is paid, will ...

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