Payout Policy_Homework.doc

Berk/DeMarzoCorporate Finance, Second Edition 219Chapter 17Payout Policy17-1.What options does a firm have to spend its free cash flow (after it has satisfied all interest obligations)?17-2.ABC Corporation announced that it will pay a dividend to all shareholders of record as of Monday, April 3, 2006. It takes three business days of a purchase for the new owners of a share of stock to be registered.a.When is the last day an investor can purchase ABC stock and still get the dividend payment?b.When is the ex-dividend day?17-3.Describe the different mechanisms available to a firm to use to repurchase shares17-4.RFC Corp. has announced a $1 dividend. If RFCs price last price cum-dividend is $50, what should its first ex-dividend price be (assuming perfect capital markets)?17-5.EJH Company has a market capitalization of $1 billion and 20 million shares outstanding. It plans to distribute $100 million through an open market repurchase. Assuming perfect capital markets:a.What will the price per share of EJH be right before the repurchase?b.How many shares will be repurchased?c.What will the price per share of EJH be right after the repurchase?17-6.KMS Corporation has assets with a market value of $500 million, $50 million of which are cash. It has debt of $200 million, and 10 million shares outstanding. Assume perfect capital markets.a.What is its current stock price?b.If KMS distributes $50 million as a dividend, what will its share price be after the dividend is paid?c.If instead, KMS distributes $50 million as a share repurchase, what will its share price be once the shares are repurchased?d.What will its new market debt-equity ratio be after either transaction?17-7.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. Natsams 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?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?c.In a perfect capital market, which policy, in part (a) or (b), makes investors in the firm better off?17-8.Suppose the board of Natsam Corporation decided to do the share repurchase in Problem 7(b), but you, as an investor, would have preferred to receive a dividend payment. How can you leave yourself in the same position as if the board had elected to make the dividend payment instead?17-9.The HNH Corporation will pay a constant dividend of $2 per share, per year, in perpetuity. Assume all investors pay a 20% tax on dividends and that there is no capital gains tax. Suppose that other investments with equivalent risk to HNH stock offer an after-tax return of 12%.a.What is the price of a share of HNH stock?b.Assume that management makes a surprise announcement that HNH will no longer pay dividends but will use the cash to repurchase stock instead. What is the price of a share of HNH stock now?17-10.Suppose that all capital gains are taxed at a 25% rate, and that the dividend tax rate is 50%. Arbuckle Corp. 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 Arbuckles stock price upon the announcement of this change?17-11.A stock that you know is held by long-term individual investors paid a large one-time dividend. You notice that the price drop on the ex-dividend date is about the size of the dividend payment. You find this relationship puzzling given the tax disadvantage of dividends. Explain how the dividend-capture theory might account for this behavior.17-12.Explain under which conditions an increase in the dividend payment can be interpreted as a signal of the following:a.Good newsb.Bad news17-13.Why is an announcement of a share repurchase considered a positive signal?17-14.AMC Corporation currently has an enterprise value of $400 million and $100 million in excess cash. The firm has 10 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share repurchase, news will come out that will change AMCs enterprise value to either $600 million or $200 million.a.What is AMCs share price prior to the share repurchase?b.What is AMCs share price after the repurchase if its enterprise value goes up? What is AMCs share price after the repurchase if its enterprise value declines?c.Suppose AMC waits until after the news comes out to do the share repurchase. What is AMCs share price after the repurchase if its enterprise value goes up? What is AMCs share price after the repurchase if its enterprise value declines?d.Suppose AMC management expects good news to come out. Based on your answers to parts (b) and (c), if management desires to maximize AMCs ultimate share price, will they undertake the repurchase before or after the news comes out? When would management undertake the repurchase if they expect bad news to come out?e.