In: Finance
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?
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