Dream Corp. has a market value equal to its book value. The firm is considering using its excess cash to complete a stock repurchase. Alternatively, it is considering paying a $10 per share cash dividend in one year and a liquidating dividend of $90 per share by selling off its entertainment business in two years. Currently, the firm has excess cash of $1,000 and other assets of $6,000. Equity is worth $18,000. The firm has 1,000 shares of stock outstanding and net income of $1,200. The required return on Dream Corp's stock is 12 percent.

1) If the company decides to repurchase stock, what will the new earnings per share be after a stock repurchase? (3 marks)

2) What is the current share price of Dream Corp. if the company decides to pay cash dividends instead of share repurchase? (5 marks)

3) In recent years, share repurchase has become an importantly way of distributing earnings to shareholders. Briefly discuss three possible reasons why stock repurchase seems to be preferred to cash dividend payment in the real world. (3 marks)

4) Stock splits are often used to adjust the market price of a stock such that it falls within a preferred trading range. Is the following statement true or false? If Dream Corp. decides to do a stock split, it would increase the total value of the common stock account. (1.5 marks)

5) In Linter's smoothing dividend model, dividend policy is described by two parameters: the target payout ratio (r) and the speed of adjustment of current dividends to target (s). Is the following statement true or false? Mature firms tend to have the low / as paying a dividend forces managers to be more disciplined. (1.5 marks)