Firm A has 50 million shares outstanding, a share price of $10 and no debt. Firm A plans to use actual cash reserves of $50 million for repurchasing shares at the current market price. Assume markets are perfectly efficient.

a. Compute the share price after the repurchase.

b. Compute the share price if the $50m were distributed as cash dividends to investors.

c. Explain if the results of parts a and b are compatible with M&M irrelevance theorem on dividends? Explain.

Max owns 50 shares of firm A and is worried about firms A decision to repurchase shares instead of paying dividends, since he would like to receive $1 dollar dividend on his shares.

d. Should Max worry about the nodividend policy of firm A? Explain how he could get (if it is possible) a $1 dollar dividend out of his investment.

e. Assume that there are transaction costs of 5% on shares (buy/purchase). Can Max get a $1 dollar dividend out of his investment in this new setting? If so, explain how.

f. With transaction costs, what will Max prefer between the strategy of part e and getting directly a $1 dollar dividend from firm A? Show your calculations.