Question

The stock of Simon will go ex-dividend tomorrow. The dividend will be $1 per share, and there are 15,000 shares of stock outstanding. The market-value balance sheet for Simon is shown below.

                   

Assets		Liabilities and Equity
Cash	$250,000	Equity	$1,000,000
Fixed assets	750,000

  

So far, price of the share today is $66.67 per share and it will sell at $65.67 per share for tomorrow.

Now suppose that Simon announces its intention to repurchase $15,000 worth of stock instead of paying out the dividend. (Round your answers to the nearest cent.)

               

a.	What effect will the repurchase have on an investor who currently holds 200 shares and sells 3 of those shares back to the company in the repurchase?

    

Total value of the position

$

       

b.	What effect will the initial cash dividend payment have on the same investor?

    

Total value of the position

$

                 

Answer 1

a)	Market value of assets after repurchase = 1000000-15000 =	$    9,85,000
	Number of shares outstanding after repurchase = 15000-15000/66.67 =	14775
	Share price after repurchase = 985000/14775 =	$          66.67
	Effect on the investor:
	Total wealth before repurchase = 200*66.67 =	$        13,334
	Total wealth after repurchase:
	Value of shares on hand = 197*66.67 =	$        13,134
	Cash on sale back = 3*66.67 =	$              200
	Total wealth after repurchase	$        13,334
	There will be no effect on the shareholders wealth.
b)	Total wealth before dividend payment = 200*66.67 =	$        13,334
	Total wealth after dividend payment:
	Market value of shares = 200*965.67 =	$        13,134
	Cash received for dividends = 200*1 =	$              200
	Total wealth after dividend payment	$        13,334
	There will be no effect on the shareholders wealth.