Question

Rudolph Corp is evaluating an extra dividend versus a share repurchase. In either case, $11,000 would be spent. Current earnings are $1.40 per share and the stock currently sells for $58 per share. There are 2,000 shares outstanding. Ignore taxes and other imperfections. What would be the new share price if Rudolph issued a dividend? (please round to 2 decimal places

Answer 1

Answer:

$52.50 per share

Explanation:

cash dividend = $11,000 / 2,000 outstanding shares = $5.50 per share

the new price of the shares = current market price - cash dividends = $58 - $5.50 = $52.50 per share

even though the price of the shares decreases, the shareholders' wealth will not decrease, since the new share price + cash dividend = $52.50 + $5.50 = $58, which is the current value per share.