Case 2: Dividend policy.

The balance sheet for Zeta Corporation is shown below in market value terms. There are 1.000 shares outstanding.

1. The company declared a cash dividend of 0.80 per share. It goes ex-dividend tomorrow. Ignoring any tax effects, what is the cum-dividend price and the ex-dividend price?

2. What will the market value balance sheet look like after the dividends are paid?

3. What if instead of cash dividend, the company has announced it is going to repurchase 800 million worth of equity. What effect will this transaction have on the equity of the firm? How many shares will be outstanding?

4. What will the price per share be after the repurchase?

5. Are the two strategies equivalent? Why, or why not?

\begin{tabular}{|l|r|l|r|} \hline \multicolumn{4}{|l|}{ Market value balance sheet } \\ \hline Cash & 200 & Equity & 4200 \\ \hline Non-current assets & 11000 & Liabilities & 7000 \\ \hline Total & 11200 & Total & 11200 \\ \hline \end{tabular}