Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Company ABC has 10,000 shares outstanding and the stock price is $100. The company is expected to pay a dividend of $10 per share next

Company ABC has 10,000 shares outstanding and the stock price is $100. The company is expected to pay a dividend of $10 per share next year and thereafter the dividend is expected to grow indefinitely by 6% a year. The company now makes an announcement: It will repurchase shares next year instead of issuing cash dividends. But from year 2 on the payout policy stays the same with cash dividends.

(Please show your work)

a. What is the expected rate of return on the stock?

b. At what price will the company repurchase shares next year? How many shares will be repurchased?

c. After the payout, what is the percentage ownership of an investor who holds 1% of the shares before the payout and does not sell shares during the repurchase?

d. Will this investor prefer cash dividend or stock repurchase? Please show your calculation.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting

Authors: Michael J. Jones

2nd Edition

1119977150, 978-1119977155

More Books

Students also viewed these Accounting questions

Question

Did you add the logo at correct size and proportion?

Answered: 1 week ago

Question

Did you ask for action?

Answered: 1 week ago