A company uses cash to pay a dividend of 10 million. It then issues more shares...

A company uses cash to pay a dividend of 10 million. It then issues more shares to new shareholders to replace cash

What will happen to the value of the excisitng shares and shareholder wealth ?

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Expert Solution

When the company initially paid a dividend of $10 mn, the cash of the company reduces by $10mn, and the stock price will also subsequently drop by an equivalent amount of $10 mn.

By issuing more shares, the number of shares outstanding will increase, which will bring down the share price of the stock.

But the overall shareholder value will remain unchanged as the amount they recieved as dividend from the company, will be equal to the value offset by the share repurchase

jeff jeffy answered 2 years ago

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