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
Assets Liabilities and Equity
Cash $100,000 equity $100,000
Fixed Assets 900,000

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Assets Liabilities and equity

Cash $100,000 Equity $1,000,000
Fixed Assets 900,000
1,000,000 1,000,000

(Note you have given the value of equity as $100,000 but there are no liabilities and for the balance sheet to balance, the value of equity should be $1,000,000)

a.What price is Payout selling today.

Value of equity= $1,000,000
Number of shares outstanding= 20,000

Therefore, price of share today= $50 =1000000/20000

b. What price will it sell for tomorrow? Ignore taxes

Dividend per share= $0.50
Therefore, price of the share tomorrow= $49.50 =50-0.5

9.Repurchases. Now suppose that Payout from problem 8 announces its intention to repurchase $10,000 worth of stock instead of paying out the dividend.

Cash paid = $10,000
Market price of shares= $50
# of shares purchased= 200 =10000/50
Number of shares outstanding= 20,000
Number of shares outstanding after repurchase= 19,800 =20000-200

Assets Liabilities and equity

Cash $90,000 Equity $990,000
Fixed Assets 900,000 19,800
990,000 shares 990,000

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?

Before repurchase

Number of shares before repurchase with the investor= 100
Price per share= $50
Market value of shares held = $5,000 =100x50

After repurchase

Number of shares after repurchase with the investor= 99
Price per share= $50
Market value of shares held = $4,950 =99x50
Amount received from the company from repurchase of shares= $50
Total= $5,000

b. Compare the effect pf the repurchase to the effects of the cash dividend that worked out in problem 8

Cash dividends

After cash dividends

Number of shares with the investor= 100
Dividend per share = $0.50
Price per share after cash dividend= $49.50
Market value of shares held = $4,950 =100x49.5
Amount received from the company in the form of dividends= $50 =100x0.5
Total= $5,000

Therefore, there is no differece in the wealth of investors between cash dividend and share repurchase

10.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 wouldthis action affect a shareholder who owns 100 shares of stock? Compare answers to problem 8 and 9

Number of shares outstanding= 20,000
Stock dividend= 1%
Therefore, Number of new shares issued as stock dividends= 200 =20000x0.01
Total number of shares after stock dividend= 20,200 =20000+200

There would be no changes in the Balance sheet figures except the number of shares outstanding

Assets Liabilities and equity

Cash $100,000 Equity $1,000,000
Fixed Assets 900,000 20,200
1,000,000 shares 1,000,000

Value of equity= $1,000,000
Number of shares outstanding= 20,200
Therefore, price of share after stock dividend= $49.50 =1000000/20200

Number of shares with the investor before stock dividend= 100
Stock dividend= 1%
Therefore, Number of new shares issued as stock dividends= 1 =100x0.01
Total number of shares after stock dividend= 101 =100+1

Number of shares with the investor= 101
Price per share= $50
Market value of shares held = $5,000 =101x49.5

Thus the wealth of the investor remains the same under stock dividends, cash dividends and repurchase of shares