Practice Problem 3:

The stock of Lombardo Corp. will go ex-dividend tomorrow. The dividend will be $1 per share, and there are 20,000 shares of stock outstanding. The market-value balance sheet for Lombardo is shown below.

Assets

Liabilities and Equity

Cash

$100,000

Equity

$1,000,000

Fixed assets

900,000

a. What price is Lombardo stock selling for today?

b. What price will it sell for tomorrow? Ignore taxes.

c.Now suppose that Lombardo Corp announces its intention to repurchase $20,000 worth of stock instead of paying out the dividend.

i).

What effect will the repurchase have on an investor who currently holds 100 shares and sells 2 of those shares back to the company in the repurchase? Describe in words and note the new number of shares outstanding and the new stock price.

ii)

Compare the effects of the repurchase to the effects of the cash dividend that you worked out in part a and b above. Explain in words.

d.Now suppose that Lombardo Corp. again changes its mind and decides to issue a 2% stock dividend instead of either issuing the cash dividend or repurchasing 2% of the outstanding stock. Discuss how would this action affect a shareholder who owns 100 shares of stock?

e. Compare with your answers to problems parts a, b, c and d above and explain the differences and impact of Lombardo's decisions.