hors d’age cheeseworks has been paying Hors d\'Age Cheeseworks has been paying a

Question

hors d’age cheeseworks has been paying Hors d'Age Cheeseworks has been paying a regular cash dividend of $5.5 per share each year for more than a decade. The company is paying out all its earnings as dividends and is not expected to grow. There are 97,000 shares outstanding selling for $83 per share. The company has sufficient cash on hand to pay the next annual dividend. Suppose that, starting in year 1, Hors d'Ae decides to cut its cash dividend to zero and announces that it will repurchase shares instead a. Is there any immediate stock price reaction? Ignore taxes, and assume that the repurchase program conveys no information about operating profitability or business risk. O Yes O No b. How many shares will Hors d'Age purchase? Number of shares

Explanation / Answer

a) Since taxes are ignored and repurchase doesn't signify anything, the stock price remains same.

b) Dividend/Share = 5.5, Shares Outstanding = 97,000, Cash = 5.5 x 97,000 = 533,500
Price/Share = 83
Shares Repurchased = 533,500/83 = 6427.71

c) Total Asset Value = 97,000 x 83 = 8,051,000
Assets earn 533,500 under each policy.

Old Policy:The annual dividend is $5.5, which never changes, so the stock price (immediately prior to the dividend payment) will be $83 in all years.

New Policy:

Shares Outstanding Share Price Shares Repurchased t=0                                97,000 $83.00                                6,428 t=1                                90,572 $88.89                                6,002 t=2                                84,571 $95.20                                5,604 t=3                                78,966 $101.95                                5,233

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