Question

ABC Corporation is an all-equity firm. The total market value of the firm is $60 million (which includes $20 million in cash), and there are 1,500,000 shares outstanding. There are no taxes. The firm is considering using $15 million of cash to pay a special one-time dividend or repurchase shares. The company’s current earnings per share are $5.00.

If the firm pays the dividend, what will be the share price of ABC stock on the ex-dividend date?

ABC Corporation is an all-equity firm. The total market value of the firm is $60 million (which includes $20 million in cash), and there are 1,500,000 shares outstanding. There are no taxes. The firm is considering using $15 million of cash to pay a special one-time dividend or repurchase shares. The company’s current earnings per share are $5.00.

If the firm chooses the share repurchase, what will be the new share price after the share repurchase?

Answer 1

A B D E F G H J к a 1 2 3 4 Current Stock Price = Market Value / No of Shares Outstanding = $60000000 / 1500000 = $40 5 6 7 8 9 If Firm Pays Dividend Dividend per Share = Cash used to pay Dividend / No of Shares Outstanding = $15000000 / 1500000 = $10 10 11 12 13 14 Ex-Dividend Share Price = Current Price - Dividend per Share = $40 - $10 = $30 15 16 17 18 b) 19 20 21 If Shares are repurchased No of Shares to be repurchased = Cash to be used for Repurchase / Current Share Price = $15000000 / $40 = 375000 22 23

A B D E F G H J к 23 24 25 26 27 28 29 No of Shares Outstanding after Repurchase = No of Shares Outstanding after Repurchase - No of Shares Outstanding = 1500000 - 375000 = 1125000 30 31 Share Price after Repurchase = Market Value after Repurchase / No of Shares after Repurchase = (Market Value before Repurchase - Cash used for Repurchase) / No of Shares after Repurchase = ($60000000 - $15000000) / 1125000 = $45000000 / 1125000 = $40 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47