A firm has 2000 shares. Both you and Ms. Doubtful are among them. Ms. Doubtful o

Question

A firm has 2000 shares. Both you and Ms. Doubtful are among them. Ms. Doubtful ow shares and is trying to fire the management, so management is offering to buy her a share premium. The current market price per share is $30. What will be the value o your shares if Ms. Doubtful takes this offer? ns 175 out for a $10 f each of 25 A $39.50 B $30.00 C $29.04 D $34.75 In which of the fo A The B 26 llowing scenarios might a dividend or stock repurchase increase firm value? firm issues debt in order to make the dividend payments or repurchase the stock Dividend payments and stock repurchases neither increase nor decrease firm value The firm makes a big dividend payment to its shareholders when management realizes that it is close to bankruptcy The firm repurchases its shares in lieu of undertaking some projects with small, positive NPVs Assume that dividends are taxed at your marginal tax rate of 25% while capital gains are taxed at 15%. How much more will you net if you earn $1000 in capital gains than if the $1000 were dividend income? 27

Explanation / Answer

25.

Total value of the firm's equity = 2000*30 = 60000

Amount paid to Mr. Doubtful = 175*(30+10) = 7000

Value of equity after paying = 60000-7000 = 53000

No. of shares remaining = 2000-175 = 1825

Value of each share = 53000/1825 = $29.04

Option C

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