Rational Demiconductor has the following market-value balance sheet:
Rational Demiconductor Balance Sheet (Market Values, in $ millions)
Surplus cash |
$ 4 |
$ 0 |
Debt |
Fixed assets and net working capital |
27 $ 31 |
31 $ 31 |
Equity market capitalization |
Assume that Rational wins a lawsuit and is paid $3 million in
cash. Its market capitalization rises by that amount. It decides to
pay out $7 per share instead of $1 per share.
a. What happens to Rational’s stock price if the
payout comes as a cash dividend?
New stock price |
b. What happens to Rational’s stock price if the
payout comes as a share repurchase? (Round your
intermediate calculations to the nearest whole
number.)
New stock price |
a)
law suit worth = $3 million
existing Equity = $31 million
New market capitalization = 31 + 3 = $34 million
Amount paid as dividend = $7
new Price = 34 - 7 = $27
b)
share price after law suit = 31 + 3 = 34
number of shares to be bought back = 7 million / 34 = 205882.35
remaining shares = 1000000 - 205882.35 = 794117.65
value after buy back = 34 - 7 = $27 million
Share price = 27,000,000 / 794117.65 = $34
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Rational Demiconductor has the following market-value balance sheet: Rational Demiconductor Balance Sheet (Market Values, in $...
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