This company is considering distributing its $150 in cash either in the form of a dividend or by buying back (and retiring) its stock. If it buys back its stock, it will pay $30/share.
|
Base |
Issue dividends |
Buyback shares |
|
|
Cash held by firm |
$150 |
$0 |
$0 |
|
Other assets |
$300 |
$300 |
$300 |
|
Total market value of stock |
$450 |
$450 |
$300 |
|
Shares |
15 |
15 |
10 |
|
Share price |
$30 |
$30 |
$30 |
|
Total cash to shareholders |
$0 |
$150 |
$0 |
- Suppose that the management of the company above has a reputation for poor investment and execution and the market therefore values the $150 cash at only $75 while held by the company. Under these circumstances:
a. What is the current total market value of the stock?
b. What is the current share price?
c. If the firm bought back shares with the $150 cash, what would the total market value of the stock be?
d. And what would the share price be?
Homework Answers
| BASE | Reputation | Buy Back Shares | |
| Cash Held By firm | $150 | $75 | $0 |
| Other Assets | $300 | $300 | $300 |
| Total Market Value of Stock | $450 | $375 | $300 |
| Shares | 15 | 15 | 9 |
| Share Price | $30 | $25 | $33.33 |
| Total Cash to Shareholder | $0 | $0 | $0 |
a. Current Total Market value of Stock = $300 + $75 (market value of Cash Held by company) = $375
b. Current Share price = current total market value of stock / number of shares = $375/ 15 = $25
c. Total market value of the stock will be equal to other assets of the firm = $300
d. Share price of the firm after buy back = Total market value of stock / number of shares = $300/9 = $33.33
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