Question

The stock of Level Corp. will go ex-dividend tomorrow. The dividend will be $1 per share, and there are 15,000 shares of stock outstanding. The market-value balance sheet for Level is shown below.

                     

Assets		Liabilities and Equity
Cash	$100,000	Equity	$900,000
Fixed assets	800,000

     

Suppose that Level changes its mind and decides to issue a 5% stock dividend instead of either issuing the cash dividend or repurchasing 5% of the outstanding stock. How would this action affect a shareholder who owns 240 shares of stock? (Round your answers to the nearest dollar.)

Total value of the position

$

Compare the effects of the repurchase to the effects of the cash dividend.

The value of the position is ,the same as, higher than or lower than under the cash dividend?

Compare the effects of the repurchase to the effects of repurchasing 5% of the outstanding stock.

The value of the position is the same as, higher than, or lower than under the repurchase?

Answer 1

1)

	Level corp	shareholder(240 shares)
Share price(before stock dividend)	$900000/15000= $60
No of shares	15000+750=15750	240+12=252
share price(after stock dividend)	$900000/15750= $57.14
Total Value of the position		$57.14*252= $14400

Note: Value of a company or any position doesn't change in case of stock dividend, Only share price decreases to make up for the dividend.

2) In case of repurchase, Total no of outstanding shares will be reduced by 750(15000*0.05)

Level corp	Shareholder
Shares left will be 14750.	Shares left will be 228(240-12)
Cash will be reduced by 750* $60= $45000	Added cash will be 12*$60=$720
New Equity will be $60*14250= $855000	New Value will be 228* $60 = $13680

Total value will be $ 855000 Total value will be $14400($720+$13680)

In case of Cash dividend of $1 per share

Level corp	Shareholder
Shares will be same i.e 15000	shares will be same i.e 240
Cash will be reduced by 15000*$1=$15000	Added cash will be 240*$1= $240
New Equity will be $59*15000=$885000	New Value will be 240*$59= 14160

Total Value will be $885000 Total value will be $14400($240+$14160)

3) Value of the position remains the same under cash dividend.