7

b) What will it sell in two days time after the ex dividend date?

c) What are the accounts affected after the dividends are paid and what will be their new

balance?

Answers: a) $23.75; b) $23.40 c) Cash $22 200 and Equity $187 200

Question 40

Uptown Interiors has decided to consider an alternative to cash dividend. Instead of paying a

dividend, the firm will repurchase $5 200 worth of stock.

a) What effect will this transaction have on the equity of the firm?

b) How many shares were repurchased? (round your answer)

c) How many shares will be outstanding?

d) What is the new equity value?

e) What will the price per share be after the repurchase?

Answer: a) reduce; b) 219; c) 7 781; d) $184 800; e) same $23.75

a) If you repurchase the stock, this is similar to a cash dividend;

your cash account falls by $5200 and so does your equity account.

b) Since the price is 23.75 then you retire 219 shares

Shr repurchased =cash/P= $5200/23.75 = 219

c) The number of shares outstanding falls from 8000 to 7781 (=8000-219).

d) New equity value, E' = E - cash = 190,000 - 5200 = 184,800

e) Since stock repurchases do not impact the value of the firm,

price/share remains unchanged at $23.75

Question 41

Shirley's and Son have a debt-equity ratio of .60 and a tax rate of 35 %. The firm does not

issue preferred stock. The cost of equity is 10 % and the cost of debt is 8 %. What is Shirley's

weighted average cost of capital?

Answer: 8.2 %

Pls define clearly.

You are an investor in BHP and own 100 shares. BHP shares sell for $41. The company is

about to pay a $1 dividend but you prefer a $3 dividend. What will you do to receive the

desired income of $300?