Problem 1: Cash Dividend-The stock of Payout Corp. Will go ex-dividend tomorrow. The dividend will be $0.50 per share, and there are 20,000 shares of staock outstanding. The market-value balance sheet for Payout is shown below
a. What price is Payout selling today.
b. What price will it sell for tomorrow? Ignore taxes
Assets Liabilities and Equity
Cash $100,000 equity $100,000
Fixed Assets 900,000
Problem 2: Repurchases. Now suppose that Payout from problem 8 announces its intention to repurchase $10,000 worth of stock instead of paying out the dividend.
a. What effect will the repurchase have on an investor who currently holds 100 shares and sell 1 of those shared back to the company in the repurchase?
b. Compare the effect pf the repurchase to the effects of the cash dividend that worked out in problem 1
Problem 3: Stock Dividend. Now suppose that Payout ratio again changed its mind and decides to issue a 1 percent stock dividend instead of either issuing the cash dividend or repurchasing 1 percent of the outstanding stock. How would this action affect a shareholder who owns 100 shares of stock? Compare answers to problem 1 and 2.