Hewlard Pocket's market value balance sheets illustrate the effects of dividends versus repurchases. Original balance sheet $150,000 Cash Debt $0 Shares outstanding 100,000 Other assets 950,000 Equity 1,100,000 Price per share $11 Value of firm $1,100,000 Value of firm $1,100,000 Pocket needs to hold on to $50,000 of cash for a future investment. Nevertheless it decides to pay a cash dividend of $2 per share, and to replace the cash with a new issue of shares. Suppose that the new shares are sold in a public issue at $9.5 a share. After the dividend is paid and the new stock is issued, what will be the wealth of the existing investors including the dividend payment?

Hewlard Pocket's market value balance sheets illustrate the effects of dividends versus repurchases. Original balance sheet $150,000 Cash Debt $0 Shares outstanding 100,000 Other assets 950,000 Equity 1,100,000 Price per share $11 Value of firm $1,100,000 Value of firm $1,100,000 Pocket needs to hold on to $50,000 of cash for a future investment. Nevertheless it decides to pay a cash dividend of $2 per share, and to replace the cash with a new issue of shares. Suppose that the new shares are sold in a public issue at $9.5 a share. After the dividend is paid and the new stock is issued, what will be the wealth of the existing investors including the dividend payment?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter15: Distributions To Shareholders: Dividends And Repurchases

Section: Chapter Questions

Problem 6MC: Suppose IWT has decided to distribute $50 million, which it presently is holding in liquid...

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