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Problem 17-7 on Ex-dividend Price Based on Chapter 17 Payout Policy

Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $15 per share. Natsam’s board has decided to pay out this cash as a one-time dividend.

a. What is the ex-dividend price of a share in a perfect capital market?

The payoff for the dividends would be $250/500 = $.50 per share. Therefore, the price for the shares would go down by that amount and would then be $14.50.

b. If the board instead decided to use the cash to do a one-time share repurchase, in a perfect capital market, what is the price of the shares once the repurchase is complete?

The price for repurchase would be the same price as the current market price, therefore it would be $15.

c. In a perfect capital market, which policy in part (a) or (b) makes investors in the firm better off?

The investors wouldn’t really care because they would end up being the same. The could choose either/or.

Problem 17-15 on Distribution to Shareholders Based on Chapter 17 Payout Policy

Suppose that all capital gains are taxed at a 25% rate and that the dividend tax rate is 50%.

Arbuckle Corporation is currently trading for $30 and is about to pay a $6 special dividend.

a. Absent any other trading frictions or news, what will its share price be just after the dividend is paid?

Suppose Arbuckle made a surprise announcement that it would do a share repurchase rather than pay a special dividend.

b. What net tax savings per share for an investor would result from this decision?

c. What would happen to Arbuckle’s stock price upon the announcement of this change?

Problem 17-19 on Dividend Capture Strategy Based on Chapter 17 Payout Policy

Que Corporation pays a regular dividend of $1 per share. Typically, the stock price drops by $0.80 per share when the stock goes ex-dividend. Suppose the capital gains tax rate is 20%,...