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BFF5925 Tutorial Week 12 Questions-2

The document contains tutorial questions for Week 12 on the topic of payout policy, covering various scenarios involving market capitalization, stock repurchases, dividends, and share prices for different companies. It includes calculations for stock prices before and after dividends or repurchases, as well as implications of these actions on market debt-equity ratios. The questions are designed to assess understanding of capital markets and the effects of payout decisions on company valuations.

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Minh Hau
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31 views2 pages

BFF5925 Tutorial Week 12 Questions-2

The document contains tutorial questions for Week 12 on the topic of payout policy, covering various scenarios involving market capitalization, stock repurchases, dividends, and share prices for different companies. It includes calculations for stock prices before and after dividends or repurchases, as well as implications of these actions on market debt-equity ratios. The questions are designed to assess understanding of capital markets and the effects of payout decisions on company valuations.

Uploaded by

Minh Hau
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

BFF5925 Tutorial Questions for Week 12

Topic 11 – Payout Policy


1. EJH Company has a market capitalization of $1.6 billion and 25 million shares
outstanding. It plans to distribute $100 million through an open market repurchase.
Assuming perfect capital markets:
a. What will the price per share of EJH be right before the repurchase?
b. How many shares will be repurchased?
c. What will the price per share of EJH be right after the repurchase?

2. KMS Corporation has assets with a market value of $585 million, $48 million of which
are cash. It has debt of $295 million, and 13 million shares outstanding. Assume perfect
capital markets.
a. What is its current stock price?
b. If KMS distributes $48 million as a dividend, what will its share price be after the
dividend is paid?
c. If instead, KMS distributes $48 million as a share repurchase, what will its share price
be once the shares are repurchased?
d. What will its new market debt-equity ratio be after either transaction?

3. Assume capital markets are perfect. Kay Industries currently has $100 million invested
in short-term Treasury securities paying 7%, and it pays out the interest payments on
these securities each year as a dividend. The board is considering selling the Treasury
securities and paying out the proceeds as a one-time dividend payment.
a. If the board went ahead with this plan, what would happen to the value of Kay
Industries upon the announcement of a change in policy?
b. What would happen to the value of Kay Industries on the ex-dividend date of the one-
time dividend?
c. Given these price reactions, will this decision benefit investors?

1
4. The Mann Company currently has 100,000 outstanding shares selling at $100 each. The
firm is contemplating the declaration of a $5 dividend at the end of the fiscal year that
just began. Assume there are no taxes on dividends.
a. What will be the price of the stock on the ex-dividend date if the dividend is declared?
b. What will be the price of the stock at the end of the year if the dividend is not declared?
c. If Mann makes $2 million of new investments at the beginning of the period, earns net
income of $1 million, and pays the dividend at the end of the year, how many shares of
new stock must the firm issue to meet its funding needs?

5. Gibson Co. has a current period cash flow of $1.2 million and pays no dividends. The
current stock price is $16.2. The company is entirely financed with equity and has
600,000 shares outstanding. Assume the dividend tax rate is zero.
Suppose the board of directors of Gibson Co. announces its plan to pay out 50 percent
of its current cash flow as cash dividends to its shareholders. What will be the stock
price on ex-dividend date if the dividend is declared?

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