CORPORATE FINANCE-ACCESS >CUSTOM<
CORPORATE FINANCE-ACCESS >CUSTOM<
11th Edition
ISBN: 9781260170016
Author: Ross
Publisher: MCG CUSTOM
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Chapter 19, Problem 8CQ
Summary Introduction

To determine: The Advantages and Disadvantages of dividend reinvestment plan.

Introduction:  A dividend reinvestment plan (DRIP) is a investment procedure in which financial specialists reinvest their cash dividends out the organization through the acquisition of extra stocks on the profit payment date.

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The DRK Corporation recently developed a dividend investment plan, or DRIP. The plan allows investors to reinvest cash dividends automatically in DRK in exchange for new shares of stock. Over time, investors in DRK will be able to build their holdings by reinvesting dividends to purchase additional shares of the company. Over 1,000 companies offer dividend reinvestment plans. Most companies with DRIP charge no brokerage or service fees. In fact, the shares of DRK will be purchased at a 10% discount from the market price. A consultant for DRK estimates that 75% of DRK’s shareholders will take part in this plan, which is somewhat higher than the average. a). Evaluate DRK’s dividend investment plan. Will it increase shareholders wealth? Discuss the advantages and disadvantages involved here. b). From a shareholder point of view, what are the advantages and disadvantages of dividend reinvestment plans? What type of investor is likely to use these, and why?
Built Rite Corp. is evaluating an extra dividend versus a share repurchase. In either case, $7,500 would be spent. Current earnings are $1.24 per share, and the stock currently sells for $32 per share. There are 5,000 shares outstanding. Ignore taxes and other imperfections. You own one share of stock in this company. If the company issues the dividend, your total investment will be worth ____ as compared to ____ if the company opts for a share repurchase.
Share repurchase proposal: Currently, the firm has available capital (cash and net income) of approximately $7,000,000. There is a large block of stock available at $35 a share. For the sake of this exercise let us disregard tax implications and effects. If the firm decides to spend this amount of excess cash on a share repurchase program, how many shares will be repurchased?? What are the benefits of repurchasing shares? How will this affect the capital structure of the company? How can this be interpreted in the marketplace? Suppose the market price of the shares is $35.75 a share. Why do you think the seller of the large block would agree to see at $35 a share? Suppose the assumptions of MM are true, then what would happen to the market price of shares once the purchase of the large block at $35 a share is completed? Would it rise above $35.75, remain unchanged or fall? Would a dividend be better? Please discuss the pros and cons of dividends and share buybacks. Make a…

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