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KMS Corporation has assets with a market value of $471 million, $35 million of which are...

KMS Corporation has assets with a market value of $471 million, $35 million of which are cash. It has debt of $290 million, and 12 million shares outstanding. Assume perfect capital markets.

a. What is its current stock price? current price is 15.08

b. If KMS distributes $35 million as a dividend, what will its share price be after the dividend is paid? dividend paid is 12.17

c. If instead, KMS distributes $35 million as a share repurchase, what will its share price be once the shares are repurchased?

d. What will its new market debt-equity ratio be after either transaction?

I'm having issues figuring out C,D please assist. I have completed A,B and answers are right.

Expert Solution

a.) Current price of stock = Market value of asset- Market value of debt/ No of shares

=471 millon-290 millon / 12 million

=181 million/12 million

=15.08$

b) If $35 million is paid as dividend than cash that is in books of company will be used and thus market value of asset will be 471-35 = 436 million

Current price of stock = 436 million- 290 million/ 12 million

=146 million /12 million

=12.17$

c) If there is share buy back than 35 million will be used to buy back share

No of shares to be bought by the company = 35 million / 15.08 = 2.32 million shares

Thus number of shares outstanding after buy back = 12 million - 2.32 million = 9.68 million shares

Market value of asset will be 471-35 = 436 million after buy back

Thus price of stock = 436 million-290 million /9.68 million

=146 / 9.68

=15.09 mln

d) New debt to equity ratio after either transaction = market value of debt/Market value of equity

= 290/436

=0.67

jeff jeffy answered 1 year ago

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