In: Finance
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? |
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.