Volcan Real Estate Company was founded 25 years ago by the current CEO, John Vol

Question

Volcan Real Estate Company was founded 25 years ago by the current CEO, John Volcan. The company purchases real estate, including land and buildings, and rents the property to tenants. The company has shown a profit every year for the past 18 years, and the shareholders are satisfied with the company's management. Prior to founding Volcan Real Estate, Volcan was the founder and CEO of a failed alpaca farming operation. The resulting bankruptcy made him extremely averse to debt financing. As a result, the company is entirely equity financed, with 12 million shares of common stock outstanding. The stock currently trades at $48.50 per share.

Volcan is evaluating a plan to purchase a huge tract of land in the southeastern China for $45 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Volcan

Explanation / Answer

In 40 years in the market I have never seen declaring a dividend raise the stock price by the amount of the dividend.

Usually when a dividend is declared it has little impact on the price of the shares until the ex-dividend date. On the ex-dividend date the price per share will drop by the amount of the dividend if it is a cash dividend.

With a share dividend it is slightly more complicated. On the ex-dividend date the price per share drops to keep the total value of the stock the same.

Before the dividend was paid the company had 8,000 x $13.60 = $108,800 worth of stock outstanding
After the divided is paid the value of the stock outstanding will be the same but the number of share will be 8,800.
The new share price will be $108,800 / 8,800 = $12.36

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