Question

1. Dividend Policy Deserts Corp. will issue dividend. The dividend will be $0.5 per share, and there are 20,000 shares of stock outstanding. The firm has $10,000 excess cash, $900,000 fixed assets and 1,000,000 equity.

a. What is Deserts’ ex-dividend price?

b. Suppose that instead of paying a dividend, Deserts Corp announces that it will repurchase stock with a market value of $10,000. What happens to the stock price when the repurchase is announced?

c. Deserts Corp. has regularly paid a quarterly dividend of $.50 per share on its 20,000 outstanding shares. Now suppose that Deserts announces that instead of paying this dividend, it plans to repurchase $10,000 worth of stock instead. What effect will the repurchase have on an investor who currently holds 100 shares and sells 1 of those shares back to the company in the repurchase?

Answer 1

price of stock Betove. Dluidend = Equity Capital No of shares 10,000,00 20000 50 Ex-dividend price price of stock Berare Dludud Diudad Per 50 -0.50 149.50 2 Suppose Re-purchase of stock is made then no of shance that can be 1oooo brought @ so its Market value - 200 New stock price damoshaverso -10000 20000Shou -20oshare 990000 -150 79800 the share price remains Game.

Errect on Snvestor tlodios 100 shares. Now, sells Los thole shares back Errect on Shectoldos wealth When No Reparchale is made Wealth of Investoy = (0 che x 050=50 Value of shares loo shoux (910=4950 Dudud fy need 5000 When I skole Sold to.company@mult ſale- Cash Rooned for share = 1x50 = 50 Dividend 99 x 0.0 = 49.50 too goshave Value of share = 99 x 49805 5000 - when he sells 100 share acesh proceech i No Impact on shar Holders Wealth. 100x50s 5000