Question

Natsam Corporation has $300 million of excess cash. The firm has no debt and 540 million shares outstanding with a current market price of $12 per share. Suppose the board decided to do a one-time share repurchase, but you, as an investor, would have preferred to receive a dividend payment. How can you leave yourself in the same position as if the board had elected to make the dividend payment instead? Which of the following is true regarding the effect of a one-time share repurchase on the stock price in a perfect market? (Select the best choice below.) O A. An open-market share repurchase decreases the share price because the firm's assets decline by purchases of the shares. OB. An open-market share repurchase has no effect on the stock price. OC. An open-market share repurchase increases the stock price due to the decrease in shares in the marketplace. OD. An open-market share repurchase has no effect on the stock price, but the stock price is not the same as the cum-dividend price if a dividend were paid instead, To leave yourself in the same position as if the board had elected to make the dividend payment instead, you can sell a percentage of your shares. The percentage you should sell is %. (Round to two decimal places.)

Answer 1

In an open market repurchase where the stock is repurchased at the market price, there is no effect of the repurchase on the stock price although both the assets as well as the no. of shares decrease in the same proportion. The price is the same as the cum-dividend stock price

So, the correct option is B

If $300 million excess cash were used for dividend , then

Dividend per share = $300 /540 = $0.5556 per share

No. of shares repurchased =$300 million/$12 per share = 25 million

% of shares repurchased = 25 million/ 540 million = 4.63%

So, if one sells 4.63% of one's shares, the effect of the same will be the same if there was a dividend payment instead