Question

A firm that 50,000 outstanding shares is planning to offer a DPS of 2.5. The price per share today is INR 55. The firm is all equity financed and currently has a cash balance of INR 5 lakhs. What is the cash balance and price per share after the dividend pay out? You hold 1200 shares of this firm. You are upset that the firm has paid you dividend and want to undo the dividend effect from your port- folio? What will be the choice to negate the dividend pay out given to you at the best extend possible and go to the status quo of pre-dividend period?

Answer 1

Number of shares outstanding = 50000

P0 or current price = INR 55

Total value of the asset = Market price per share(P0) * Number of shares outstanding

=>Total value of the asset= INR 55*50000

=>Total value of the asset = INR 2750000

Dividend paid = Dividend per share (DPS)*Number of shares outstanding

=>Dividend paid = INR 2.5 * 50000

=>Divodend paid = INR 125000

Cash balance before dividend payment	INR 500000
Less-Dividend paid	INR 125000
Cash balance after Dividend payment	INR 375000

Calculation of after dividend market price
Particulars	Amount (INR)
Total Assets before dividend payment	2750000
Less-Dividend paid	125000
Total asssets after Dividend payment(A)	2625000
Number of shares Out standing(Nos.)(B)	50000
Price per share After dividend payment(A/B)	INR 52.5

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Ypu are Holding 1200 share in the Firm.

Value of your holding before dividend = 1200 share * INR 55 Per share =INR 66000

Value of your holding after dividend = 1200 share * INR 52.5 Per share =INR 63000

You received dividend of = 1200 share * INR 2.5 per share = INR 3000

But you want to restore the value of your holding to INR 66000.

YOU CAN DO SO, by purchasing the share of the firm by using the dividend amount received.

Number of share you can buy by using the dividend amount = INR 3000/ INR 52.2 Per share = 57 share

Now you have 1200+57 = 1257 share

Cash balance with you after purchase of 57 share = [INR 3000]-[57 Share*INR 52.50] =INR 7.5

and value of your new holding = 1257 share * INR 52.50 per share = INR 65992.5 Whish is almost equal to the value of your previous holding.

hence the best possible choice is to use the dividend received to buy the share of the firm to go to the status quo of pre-dividend period.