•Natsam Corp has 500 million shares outstanding at $15 per share. •They also hav

Question

•Natsam Corp has 500 million shares outstanding at $15 per share.

•They also have $250 million in excess cash that they want to distribute to shareholders.

•Assume perfect capital markets.

1.If management pays out the cash as a one-time dividend, what is the ex-dividend price of the shares?

2.If they decide to do a one-time share repurchase what is the ex-post price of the shares.

3.Suppose an individual investor owns 1,200 shares and the company undertakes the share repurchase. The investor would have preferred the cash dividend. What should the investor do?

Explanation / Answer

Ans 1) Ex dividend price = $15 - $250/500

= $15 - $.5 = $14.5

Ans 2) Comapny can buy back 250Million/ 15 sahres = 16.67 Million shares

Now the number of outstanding share = 500 million - 16.67 Million = 483.33 Million share

Ex- post price of share = 500 * 15/483.33

= $15.52

Ans 3) Investor should keep the share so that he will be benifitted by increase in share price.

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