There are 2000 shares outstanding. Assume that the company currently has $5,000

Question

There are 2000 shares outstanding. Assume that the company currently has $5,000 in cash, $100,000 in long-term assets, and a valuable investment opportunity which promises a NPV equal to $20,000. The company has no debt currently. The company has decided to pay out a cash dividend of $5000 without impacting its investment nor borrowing decisions. a. What happens to the stock price before and after the dividend? b. Would you say that shareholders got worse off as a result? Why or why not. c. What if the company

Explanation / Answer

Hi, if you like my answer please rate me life-saver first. a) The share price will fall by = $5000/2000 = $2.5 b) There is no change in shareholder's status. since the decrease was paid off with cash dividend. c) The stock price change due to dividend will be a decrease of $2.5 irrespective NPV. before dividend => $62.5 (calculated below) after will be $60 d) Total company's worth = $5000 + $100000 + $20000 = $125000 Company's worth per share = $62.5 So company should buyback @ $62.5 per share.

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