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Hewlard Pocket’s market value balance sheet is given. Assets Liabilities and Shareholders’ Equity A. Original balance...
Hewlard Pocket’s market value balance sheet is given.
| Assets | Liabilities and Shareholders’ Equity | ||||||||||||
| A. Original balance sheet | |||||||||||||
| Cash | $ | 150,000 | Debt | $ | 0 | ||||||||
| Other assets | 950,000 | Equity | 1,100,000 | ||||||||||
| Value of firm | $ | 1,100,000 | Value of firm | $ | 1,100,000 | ||||||||
| Shares outstanding = 100,000 | |||||||||||||
| Price per share = $1,100,000 / 100,000 = $11 | |||||||||||||
Pocket needs to hold on to $52,000 of cash for a future investment. Nevertheless, it decides to pay a cash dividend of $2.10 per share and to replace cash as needed with a new issue of shares. After the dividend is paid and the new stock is issued:
a. What will be the price per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. What will be the total value of the company? (Enter your answers in whole dollars, not in millions.)
c. What will be the total value of the stock held by new investors? (Enter your answers in whole dollars, not in millions. Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)
d. What will be the wealth of the existing investors including the dividend payment? (Enter your answers in whole dollars, not in millions. Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)
|
Solutions
Expert Solution
| a) | ||||||||||
| Dividend Paid = 2.1 * 100000 = | $ 210,000.00 | |||||||||
| Calculation of cash requirement for payment of dividend | ||||||||||
| Opening Cash | $ 150,000.00 | |||||||||
| Dividend Paid = 2.1 * 100000 = | $ (210,000.00) | |||||||||
| Closing Balance | $ (60,000.00) | |||||||||
| Minimum Cash Requirment= | $ 52,000.00 | |||||||||
| Cash Short | $ 112,000.00 | |||||||||
| New No. of Share Require Issue for Cash = | Cash Short (Value of Share issued )/Share Price | |||||||||
| New No. of Share Require Issue for Cash = | 112000/11 | |||||||||
| New No. of Share Require Issue for Cash = | 10181.81818 | Share | ||||||||
| Old Shares outstanding = | 100000 | Share | ||||||||
| New Total Shares outstanding = | 110181.8182 | Share | ||||||||
| New Value of Firm = | Value of Firm (Old) + Value of Share Issued - Dividend Paid | |||||||||
| New Value of Firm = | 1,100,000+112,000-210,000 | |||||||||
| New Value of Firm = | $ 1,002,000.00 | |||||||||
| Price Per Share = | Value of firm/ Total outstanding share | |||||||||
| Price Per Share = | $ 9.09 | |||||||||
| b) | New Value of Firm = | Value of Firm (Old) + Value of Share Issued - Dividend Paid | ||||||||
| New Value of Firm = | 1,100,000+112,000-210,000 | |||||||||
| New Value of Firm = | $ 1,002,000.00 | |||||||||
| c) | ||||||||||
| Total value of stock held by new investors= | No. of Share (New)* Price per Share | |||||||||
| Total value of stock held by new investors= | 10181.82*9.09 | |||||||||
| Total value of stock held by new investors= | $ 92,594.06 | |||||||||
| d) | Wealth of the existing investors = | No. of Share (Existing)*Price Per Share + Dividend Paid | ||||||||
| Wealth of the existing investors = | 100,000*9.09+210,000 | |||||||||
| Wealth of the existing investors = | $ 1,119,405.94 |
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jeff jeffy answered 2 years agoRelated Solutions
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Debt
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Other assets
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Equity
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