Alex, Inc. is financed $100\%$ with equity. The firm has $100,000$ shares of stock outstanding with a market price of $$5$ per share. Total earnings for the most recent year are $$50,000.$ The firm

has $$40,000$ excess cash. It is considering using this excess cash to pay it out as dividend or use

it to repurchase $$40,000$ of its own stock. The firm has other assets worth $$460,000($at market

value$).$ For each of the questions that follow, assume no transaction costs, and no taxes except

for questions $21$ and $22.$

$17.$ Assume the firm pays the $$40,000$ excess cash in the form of a cash dividend. What

will be the market price per share of Gandhi$$s stock once the dividend is paid?

a$)$ $$4\mathrm{.}50$

b$)$ $$4\mathrm{.}75$

c$)$ $$4\mathrm{.}60$

d$)$ $$5\mathrm{.}25$

$18.$ Assume the firm pays the $$40,000$ excess cash in the form of a cash dividend. What

will be the firm$$s price$/$earnings ratio once the dividend is paid?

a$)9\mathrm{.}20$

b$)9\mathrm{.}25$

c$)9\mathrm{.}50$

d$)9\mathrm{.}75$

$19.$ Assume the firm uses the $$40,000$ excess cash to buy back its stock at $$5$ per share.

What will be the market price per share of Gandhi$$s stock after the repurchase?

a$)$ $$5\mathrm{.}50$

b$)$ $$5\mathrm{.}25$

c$)$ $$4\mathrm{.}75$

d$)$ $$5\mathrm{.}00$

$7$

$20.$ Assume the firm uses the $$40,000$ excess cash to buy back its stock at $$5$ per shares.

You own $10\%$ of the firm$$s stock before the repurchase and this comprises your total

wealth. How will you create $$home$-$made dividend$?$

a$)$ Sell no shares

b$)$ Sell $475$ shares

c$)$ Sell $500$ shares

d$)$ Sell $800$ shares

$21.$ Suppose your $10,000$ shares were originally purchased for $$3$ per shares, the dividend

income is subject to a $30\%$ income tax rate, and capital gains are taxed at half the regular

tax rate of $40\%.$ How much more or less tax will you pay in creating home$-$made

dividend if the firm were to use its $$40,000$ excess cash to buy back its stock?

a$)$ $$800$

b$)$ $$880$

c$)$ $$900$

d$)$ $$950$

$22.$ Suppose the firm uses its excess cash to buy back its stock. How many shares will you

sell to have an after$-$tax amount equal to the after$-$tax amount you would have had if the

firm had paid its excess cash as dividend?

a$)560\mathrm{.}26$

b$)580\mathrm{.}75$

c$)608\mathrm{.}70$

d$)680\mathrm{.}50$

e$)$ None of the above