Question

Natsam Corporation has $285 million of excess cash. The firm has no debt and 549 million shares outstanding with a current market price of $11 per share. Natsam's board has decided to pay out this cash as a one-time dividend.
1. What is the ex-dividend price of a share in a perfect capital market?
2. If the board instead decided to use the cash to do a one-time share repurchase, in a perfect capital market, 3. what is the price of the shares once the repurchase is complete?
3. In a perfect capital market, which policy in part (a) or (b) makes investors in the firm better off?

Answer 1

Answer:

1. The ex-dividend price of a share is $10.49

2. The price of the shares once the repurchase is complete is $11 per hare

3. In a perfect capital market, the policy b would make investors in the firm better off

Explanation:

1. In order to calculate the ex-dividend price of a share in a perfect capital market we would have to make the following calculation:

ex-dividend price of a share=current market price-dividend per share

current market price=$11 per share

dividend per share= $285 million/549 million

dividend per share=$0.51 per share

Therefore, ex-dividend price of a share=$11-$0.51

ex-dividend price of a share=$10.49

2. According to the given data the current market price is $11 per share, therefore, the price of the shares once the repurchase is complete If the board instead decided to use the cash to do a one-time share repurchase is $11 per share

3. In a perfect capital market, the policy b would make investors in the firm better off