Business & Finance

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 payout this cash as a one-time dividend.

 

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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?

 

 

 

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%, but investors pay different tax rates on dividends.

 

 

 

Absent transactions costs, what is the highest dividend tax rate of an investor who could gain from trading to capture the dividend?

 

 

 

 

 

 

 

 

 

Problem 23-5 on Preferred Stock based on Chapter 23 Raising Equity Capital

 

 

 

Three years ago, you founded your own company. You invested $100,000 of your money and received 5 million shares of Series A preferred stock. Since then, your company has been through three additional rounds of financing.

 

 

 

 

 

Round Price ($) Number of Shares
Series B 0.50 1,000,000
Series C 2.00 500,000
Series D 4.00 500,000

 

 

 

 

 

a.    What is the pre–money valuation for the Series D funding round?

 

 

 

b.    What is the post–money valuation for the Series D funding round?

 

 

 

c.    Assuming that you own only the Series A preferred stock (and that each share of all series of preferred stock is convertible into one share of common stock), what percentage of the firm do you own after the last funding round?

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