House of Haddock has 5,090 shares outstanding and the stock price is $149. The c
ID: 2719204 • Letter: H
Question
House of Haddock has 5,090 shares outstanding and the stock price is $149. The company is expected to pay a dividend of $29 per share next year and thereafter the dividend is expected to grow indefinitely by 2% a year. The President, George Mullet, now makes a surprise announcement: He says that the company will henceforth distribute half the cash in the form of dividends and the remainder will be used to repurchase stock. There are no taxes.
a-1. What is the total value of the company before the announcement? (Enter your answer in whole numbers not in millions.)
Total value $
a-2. What is the total value of the company after the announcement? (Enter your answer in whole numbers not in millions.)
Total value $
a-3. What is the value of one share? (Do not round intermediate calculations. Round your answer to the nearest whole dollar.)
Value $
b. What is the expected stream of dividends per share for an investor who plans to retain his shares rather than sell them back to the company? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
year 1: $
year 2: $
Explanation / Answer
Answer:-
a-1. What is the total value of the company before the announcement?
Company's vlaue remian unchanged at 5,090 shares outstanding and the stock price is $149 = 5,090*149 = $758,410
a-2. What is the total value of the company after the announcement?
After Announcement also Company's value remian unchanged at 5,090 shares outstanding and the stock price is $149 = 5,090*149 = $758,410
So taotla shreholders value remain unchamged at $758,410
a-3. What is the value of one share?
Share price stays at $149
b. What is the expected stream of dividends per share for an investor who plans to retain his shares rather than sell them back to the company?
(29/149)+0.02 = 21.46%= Discount rate
Year 1
=(1+.2146)*149 = $180.98
Company repurchases = 73,805/180.98 = 408 shares
Number of shares outstanding = 5,090-408 = 4,682 shares
Dividend payment in year 1 falls to 5,090 x 14.50 = 73,805 which is equivalent to 73,805/(5090-408) = $15.76/share
P1 = $180.98
g = 2%
Expected Div2 = Div1*1.02 = $15.76*1.02 = $16.08
The required rate for year 2
r2 = Div2/P1+g = 16.08/180.98+0.02 = 0.1088 = 10.88%
Year 2
P2 = P1*(1+r2) = 180.98*(1+0.1088) = $200.68
Total dividend payment expected to grow ar 2%, So
73,805*1.02 = 75,281= amount used for repurchase
Hence number of shares repurchaes
73,805/200.68 = 375 shares
Number of shares oustanding = 4,682-375= 4,307 shares
DIV2 = 73,805/4,463 = $17.14
Items Do not pay dividend Pay $29 Dividend distribute half the cash in the form of dividends and the remainder will be used to repurchase stock Cash $147,610 0 $73,805 Asset value $610,800 $610,800 $610,800 Total value 758,410 $610,800 $684,605 No.of shares 5,090 5,090 N(N<5,090) Price per share $149 $120 $684,605/N Total shareholders value $758,410 $120*5,090+$147,610=$758,410 =($684,605/N)*N+73,805 = $758,410Related Questions
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