17.2 If a dividend is paid, the stock price falls by the amount of the dividend. If the company instead uses the cash for a share repurchase, the stock price remains unchanged but, with fewer shares left outstanding, the market value of the firm falls by the same amount as it would have if the dividend had been paid.

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Assets After cash dividend Cash Other assets Value of firm Liabilities and Equity $ 0 Debt 850,000 Equity $850,000 Value of firm Shares outstanding = 100,000 Price per share = $850,000/100,000 = $8.50 After stock repurchase Cash Other assets Value of firm $ 0 Debt 850,000 Equity $850,000 Value of firm Shares outstanding = 85,000 Price per share = $850,000/85,000 = $10 $ 0 850,000 $850,000 $ 0 850,000 $850,000