Question

Natsam Corporation has $264 million of excess cash. The firm has no debt and 472 million shares outstanding with a current market price of $11 per share.​ Natsam's board has decided to pay out this cash as a​ one-time dividend.

a. What is the​ ex-dividend price of a share in a perfect capital​ market?

b. If the board instead decided to use the cash to do a​ one-time share​ repurchase, in a perfect capital​ market, what is the price of the shares once the repurchase is​ complete?

c. In a perfect capital​ market, which policy in part ​(a​) or (b​) makes investors in the firm better​ off?

A. answer for part a = $11.56; answer for part b = $11; answer for part c = policy in part (a) is better

B. answer for part a = $11; answer for part b = $11; answer for part c = investors are indifferent between parts (a) and (b)

C. answer for part a = $10.44; answer for part b = $11; answer for part c = investors are indifferent between parts (a) and (b)

D. answer for part a = $10.44; answer for part b = $10.44; answer for part c = policy in part (b) is better

Answer 1

a)

Given, excess cash= 264 million

Number of shares = 472 million shares

Hence dividend per share= excess cash/ Number of shares= 264/472= 0.56/Share

Price before dividend = 11

Dividend paid = 0.56

Hence price after dividend = 11-0.56= 10.44

Hence answer to question a= 10.44

b)

Given excess cash =264 Million

Since the repurchase will occur at current price i.e 11 per share

hence Number of shares repurchased = 264 Million /11= 24Million

Hence the remaining shares =472 Million- 24 Million = 448 Million shares

Since the price after the repurchase shall remain the same as 11/ Share as only number of shares are reducing and tt the same price the repurchase is happening at same price

hence price after repurchase = 11

c)

Shareholders wealth before ex dividend in option a = 472 million shares * 11 per share = 5192 Million

Payment to shareholders through dividend = 0.56 per share * 472 million = 264.32 Million

price after ex dividend = 10.44

hence the shareholders wealth = 10.44 * 472 million= 4927.68

Hence total value to shareholder = Shareholders wealth + dividend pay out = 4927.68+264.32= 5192 Million

Hence the shareholders value remains same even after the dividend pay out

In question b

Value of shares before repurchase= price per share * Number of shares = 11*472= 5192 Million

Value of which shares at purchased = 264 million

Value of shares remaining = 11 per share *Share remaining

Shares remaining= 472- 24= 224 Million shares

Value of shares = 11*448= 4928 Million

Hence the value of shareholder after repurchase = repurchase amount + value of shares remaining

= 264+ 4928

=5192

Since the value of shareholders remain same in dividend and share repurchase condition

Hence the correct answer is C. answer for part a = $10.44; answer for part b = $11; answer for part c = investors are indifferent between parts (a) and (b)