Question 1 Answers

1 a)

We divide the equity value by the number of outstanding shares to get the current stock price:

Stock price today = Equity / Number of shares

Stock price today = $503,000 / 12,000 shares

Stock price today = $41.92

Therefore, the stock price selling today is $41.92.

b)

The dividend payout will be reflected in the stock price selling tomorrow. The stock price will drop by the amount of the dividend because the payout is $1.9 per share.

The stock price tomorrow = Stock price today - Dividend per share

The stock price tomorrow = $41.92 - $1.9

The stock price tomorrow =$40.02

Therefore, the stock price selling tomorrow is $40.02

c)

Investors are required to pay tax on dividends received if the dividend tax rate reaches 10%. In this instance, the dividend's after-tax value will be decreased by the dividend tax. Because of the lowered dividend payment due to the tax, the stock price selling tomorrow will be lower.

The stock price selling tomorrow with dividend tax = (Stock price tomorrow - Dividend per share * Tax rate)

Stock price selling tomorrow with dividend tax = $40.02 - (1.9*0.10)

Stock price selling tomorrow with dividend tax = $40.02 - 0.19

Stock price selling tomorrow with dividend tax = $39.83

Therefore, if the dividend tax rate is 10%, the stock price selling tomorrow will be $39.83, which is lower than the answer obtained in part b).

In Q1, suppose the company gives up the cash dividend plan because of shareholder opposition. Instead, the company decides to buyback $22,800 worth of stock.

a) How many shares will be repurchased?

b) What will the price per share be after the repurchase according to MM model?