Question
The balance sheet for Serenity Corporation is shown below in market value terms. There are 2.4 billion shares outstanding. MARKET-VALUE BALANCE SHEET (Figures in millions)
The balance sheet for Serenity Corporation is shown below in market value terms. There are 2.4 billion shares outstanding.
MARKET-VALUE BALANCE SHEET (Figures in millions)
Cash 315 Equity 4,022
Non-current assets 10,256 Liabilities 6,549
Total 10,571 Total 10,571
Instructions:
1. The company declared a cash dividend of 0.61 per share. It goes ex-dividend tomorrow. Ignoring any tax effects, what are the shares selling for today? What will they sell for tomorrow? What will the market value balance sheet look like after the dividends are paid?
2. What if instead of cash dividend, the company has announced it is going to repurchase 1 billion worth of equity. What effect will this transaction have on the equity of the firm? How many shares will be outstanding? What will the price per share be after the repurchase?
3. Ignoring tax effects, explain how the share repurchase is effectively the same as a cash dividend.
BOOK-VALUE BALANCE SHEET (Figures in millions)
Assets Liabilities and Equity
Cash and short-term securities 1 / Bonds (par value 1000; coupon 8% paid annually; maturity 10 years; yield to maturity 9%) 10
Accounts receivable 3 / Preferred stock (par value 20) 2
Inventories 7 / Common stock (par value 0.10) 0.1
Plant and equipment 21 / Additional paid-in stockholders equity 9.9
/ Retained earnings 10
Total 32
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