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Built Rite Corp is evaluating an extra dividend versus a share repurchase
Built Rite Corp is evaluating an extra dividend versus a share repurchase. In either case, $5,500 would be spent. Current earnings are $1 per share, and the stock currently sells for $27 per share. There are 2,500 shares outstanding. Ignore taxes and other imperfections. You own one share of stock in this company. If the company issues the dividend, your total investment will be worth ____ as compared to ____ if the company opts for a share repurchase. $26; $27 $27; $26 $24.80; $27. $23; $33 $27; $27
The correct answer is 27,27, but why 27 if there is a stock dividend? The price/stock should goes down
Expert Solution
Solution
It is correctly noted in the above question that the price if stock will go down when the dividend is issued. And if all other imperfections are ignored, price of stock should go down by exact amount of dividend. We are asked to calculate the worth of investment if stock dividend is issued. So when dividend is issued we will recive dividend and stock price will go down by exact amount of dividend. So effectiley our investment will still be worth the price that was prevelant before the issuance of dividend as we have received dividend equivalent to fall in the stock price.
And with re-purchase we will receive price per share which is $ 27.
So correct answer is 27,27 only.
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