In: Finance
The stock of Payout Corp. will go ex-dividend tomorrow. The dividend will be $1 per share, and there are 10,000 shares of stock outstanding. The market-value balance sheet for Payout is shown below. |
Assets | Liabilities and Equity | ||
Cash | $200,000 | Equity | $1,000,000 |
Fixed assets | 800,000 | ||
Suppose that Payout changes its mind and decides to issue a 1% stock dividend instead of either issuing the cash dividend or repurchasing 1% of the outstanding stock. How would this action affect a shareholder who owns 900 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 (Click to select)lower thanhigher thanthe same as under the cash dividend. |
Compare the effects of the repurchase to the effects of repurchasing 1% of the outstanding stock. |
The value of the position is (Click to select)the same aslower thanhigher than under the repurchase. |
1. Shareholder holding 900 shares would have got $900 as dividend if cash dividend is given.
However, the market value of each stocks would also fall by $1 or the overall market value will fall by the dividend paid ie $ 10,000. The current market value per share is Total Equity/number of shares outstanding = $1,000,000/10,000 = $100.
This becomes $99 after dividend is paid.
Hence the value received and balance share value for the shareholder = $ 900 (cash dividend received) + $99 *900 (value of 900 shares) = $900 + $89,100
= $ 90,000
Now if 1% share dividend is given, then the shareholder does not receive any dividend. The overall market value remains the same as $1,000,000 but the number of shares outstanding increase by 1% of 10,000 = by 100.
New number of shares outstanding = 10,100
Hence, new per share value = $1,000,000/10,100 = $99.01 (rounded off)
The shareholder who had 900 shares will get 1% extra shares as share dividend = 900*1% = 9
Hence he has 909 shares now with per share value of $ 99.01
His total share value = 909*$99.01 = $90,000 (rounded off)
2. Repurchase to cash dividend:
If 1% shares are repurchased, then shares to be repurchased = 10000 *1% = 100
then number of shares outstanding = 10,000 -100 = 9,900
Te market value of all shares will reduce by the value paid for share purchase.
The market value of each share is $100 (as shown earlier). Hence cash paid for repurchase of 100 shares = 100 *$100 = $10,000
Market value of all shares after share purchase = $1,000,000 - $10,000 = $990,000
Market value per share of the 9,900 shares after share repurchase= $ 990,000/9,900 = $ 100
The number of share repurchased from shareholder having 900 shares = 900 * 1% = 9
The cash value given to him = 9 * $100 = $900
The market value of remaining 891 shares (900 - 9) = 891 * 100 = $ 89,100
Hence the value received and balance share value for the shareholder = $ 900 (share repurchase cash) + $89,100 (market value of remaining shares)
= $ 90,000
Value of position in cash dividend is also $90,000 (as calculated above in 1)
Hence value of position is same in 1% share repurchase and cash dividend
3. Compare the effects of the repurchase to the effects of repurchasing 1% of the outstanding stock.
There seems a typing error here as repurchase and repurchase 1% of outstanding stock seems same here.
Perhaps it wanted to compare repurchase of shares to stock dividend
Value of position of repurchase of shares = $90,000 (as calculated in 2)
Value of position of stock dividend = $ 90,000 (as calculated in 1)
Hence the value of position of both is same.