Opus plc has been paying a regular cash dividend of 4 per share at the end of each year for over a decade. The company is paying out all its earnings as dividends and is not expected to grow. There are 100,000 shares outstanding trading for 80 per share. The company has enough cash on hand to pay the next annual dividend. Assume that, starting in year 1, the company decides to reduce its cash dividend to zero and announces that it will repurchase shares instead.

i.Theoretically, what would you envisage as the immediate stock price reaction to be? Ignore taxes, and assume that the repurchase program conveys no information about operating profitability or business risk.

ii.Calculate the number of shares that the company would repurchase.

Project and compare the future stock prices for the dividend-paying strategy and the share buyback policy for years 1, 2 and 3.