firm has an excess cash flow of $4.8m. It had 3m shares outstanding and was considering...

firm has an excess cash flow of $4.8m. It had 3m shares outstanding and was considering paying a cash dividend, corresponding to a 40% payout. The stock traded in the market at $88.00 per share. Assume that the average investor holds 155 shares of the company’s stock. Note: The term “k” is used to represent thousands (× $1,000). Required: What would be the average portfolio value after a re-purchase scenario?

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Expert Solution

Sol:

Excess cash flow = $4.8 million

Outstanding shares = 3 million

Dividend payout ratio = 40%

Market price per share = $88

Average investor holding = 155 shares

To determine average portfolio value after a re-purchase scenario:

Current market value = Outstanding shares x Market price per share

Current market value = 3 million x $88 = $264 million

Dividend payout = Excess cash flow x Dividend payout ratio

Dividend payout = 4.8 million x 40% = $1.92 million

Market capitalization post dividend payout = Current market value - Dividend payout ratio

Market capitalization post dividend payout = $264 million - $1.92 million = $262.08 million

Price per share post dividend payout = Market capitalization post dividend payout / Outstanding shares

Price per share post dividend payout = $262.08 million / 3 million = $87.36

Average portfolio value = Average investor holding x Price per share post dividend payout

Average portfolio value = 155 x $87.36 = $13,540.80 or $13.54k

Therefore average portfolio value after a re-purchase scenario is $13.54k

jeff jeffy answered 1 year ago

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