Question

Use the following information to answer the questions.

Alex, Inc. is financed 100% with equity. The firm has 100,000 shares of stock outstanding with a market price of $5 per share. Total earnings for the most recent year are $50,000. The firm has $25,000 excess cash. It is considering using this excess cash to pay it out as dividend or use it to repurchase $25,000 of its own stock. The firm has other assets worth $475,000 (at market value). For each of the questions that follow, assume no transaction costs, and no taxes except for question 22 and 23.

Assume the firm uses the $25,000 excess cash to buy back its stock at $5 per share. You own 10% of the firm's stock before the repurchase and this comprises your total wealth. How will you create "home-made dividend"?

Answer 1

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Q ENG 03:04 30-07-2020 99+ 32 U34 . L K . M N O Р Q R S T U V W X 30 31 32 33 34 company has 25000 excess cash company can pay dividend or repurchase shares As company opt for repurchase, dividend will not be paid so how to create homemade leverage 35 dividend per share = 25000/100000 shares = 0.25 36 37 As you hold 10% shares, you holds =100000 x 10% = 10000 shares so dividend for 10% holding = 10000 x 0.25 = 2500 38 39 40 41 so to get 2500 as dividend, you have to sell = 500 shares [2500/5] 42 43 44 It will keep you holding at 10% and you will get 2500 homemade dividend as well 45 46 5000 No of shares repurchased by company = 25000/5 = No of shares left after repurchase = 100000 - 5000 = 95000 47 48 49 left with = 9500 You hold 10000 shares, you sold 500 sh so your holding again = 9500/95000 = 10% 50 51 52 53 Answer sell 500 shares DGM beta VAR port future INDEX WACC HEDGE INTL CAP BUD Sheet11 SANDRINE LEASING PORTFOLOQ | DIR right clean ...