Question

A 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 176 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?

$Answer Do not round intermediate calculations. Input your answer in thousands ($k) rounded to 3 decimal places (for example: 28.31k).

Answer 1

Sol:

Excess cash flow = $4.8 million

Outstanding shares = 3 million

Dividend payout ratio = 40%

Market price per share = $88

Average investor holding = 176 shares

The process to determine average portfolio value after a re-purchase scenario is as follows:

Current market capitalization = Outstanding shares x Market price per share

Current market capitalization = 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 = 176 x $87.36 = $15,375.36 or $15.37k

Therefore average portfolio value after a re-purchase scenario is $15.37k