Question

The balance sheet for Fourth Corp. is shown here in market value terms. There are 5,000 shares of stock outstanding. Market Value Balance Sheet Cash $ 44,300 Equity $ 414,300 Fixed assets 370,000 Total $ 414,300 Total $ 414,300 The company has declared a dividend of $2.00 per share. The stock goes ex-dividend tomorrow. Ignoring any tax effects, what is the stock selling for today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Ignoring any tax effects, what will it sell for tomorrow? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Let us plot the balance sheet of forth corp as on market value terms.

Assets	Amount		Liabilities	Amount
Cash	44300		Equity	414300
Fixed Assets	370000
Total	414300		Total	414300

Now we have the equity Market Value of $ 414300.

Also given the no.s of Share = 5000

Therefore value of each share = Equity Market Value/No. of Share

Value of each share = $ 414300/5000 = $ 82.86

Therefore Answer the value of share today = $ 82.86

Now, dividend per share is $2
New Stock Price = Current Stock Price - Dividend Declared

(as the current stock price would decrease to the tune of the dividend declared).

New Stock Price Ex Dividend = $82.86 - $ 2

Price Ex Dividend = $80.86

Therefore post the declaration of this dividend the cash will decrease by $10000 and so will the equity value. Let us now look at the revised Balance Sheet post the payment of Dividend

Assets	Amount		Liabilities	Amount
Cash	34300		Equity	404300
Fixed Assets	370000
Total	404300		Total	404300

Now Equity Value = $ 404300

Therere Price per Share = $ 404300 /5000 = $ 80.86

Answer the value of share ex dividend is $80.86.