B3. (Cash dividend versus share repurchase) Consider a firm thathas decided to m
ID: 2661499 • Letter: B
Question
B3. (Cash dividend versus share repurchase) Consider a firm thathas decided to make, but has not yet announced, a large“bonus” cash dividend amounting in the aggregate to $5million. The firm has 1 million shares outstanding that sell for$20 each. The firm has no debt; there are no taxes; and alltransactions take place in a perfect capital market. Usingcalculations like those in the illustration of dividend irrelevancein a perfect capital market, show that shareholders will beindifferent between whether the firm pays out the“bonus” as a dividend or uses the money to buy back $5million of its shares.
Explanation / Answer
Total Cash Dividend value $5,000,000 Number of shares outstanding $1,000,000 Value per share $20 Total Market capitalization ($1,000,000 * $20) $20,000,000 Number of Shares repurchases ($5,000,000 /$20) 250,000 shares If the shareholders uses its $5,000,000 worth of cash dividendto repurchase the shares buy back, then each and every share holder will get 250,000 additionalshares. Total Cash Dividend value $5,000,000 Number of shares outstanding $1,000,000 Value per share $20 Total Market capitalization ($1,000,000 * $20) $20,000,000 Number of Shares repurchases ($5,000,000 /$20) 250,000 shares If the shareholders uses its $5,000,000 worth of cash dividendto repurchase the shares buy back, then each and every share holder will get 250,000 additionalshares.hoep this helps Total Cash Dividend value $5,000,000 Number of shares outstanding $1,000,000 Value per share $20 Total Market capitalization ($1,000,000 * $20) $20,000,000 Number of Shares repurchases ($5,000,000 /$20) 250,000 shares If the shareholders uses its $5,000,000 worth of cash dividendto repurchase the shares buy back, then each and every share holder will get 250,000 additionalshares.
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