Question
Your company's share have a price equal to $140. At the end of the year the company will pay all the cash produced in the
Your company's share have a price equal to $140. At the end of the year the company will pay all the cash produced in the form of dividend of $20 per share. You have 5000 shares outstanding and your dividend grows at 5% per year. Today, the company unexpectedly changes its payout policy: half the cash will be paid in the form of dividends and the remainder will be distributed via stock repurchase. Assume the shares are repurchased before the dividend is paid.
What is the total value of the company before the announcement?
What is the total value of the company after the announcement?
Compute the dividend per share under the new payout policy for year 1,2 and3 for an investor who plans tor etain his shares rather than sell them back to the company.
Show that the price computed via the dividend discount model (DDM) stays the same under the new policy.
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