1.What options does a firm have to spend its free cash flow (after it has satisfied all interest obligations)?
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?
3.Describe the different mechanisms available to a firm to use to repurchase shares
4.RFC Corp. has announced a $1 dividend. If RFC’s price last price cum-dividend is $50, what should its first ex-dividend price be (assuming perfect capital markets)?
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?
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?
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. Natsam’s 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?
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?
9.Suppose you work for Oracle Corporation, and part of your compensation takes the form of stock options. The value of the stock option is equal to the difference between Oracle’s stock price and an exercise price of $10 per share at the time that you exercise the option. As an option holder, would you prefer that Oracle use dividends or share repurchases to pay out cash to shareholders? Explain.
10.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?
11.Using Table 17.2, for each of the following years, state whether dividends were tax disadvantaged or not for individual investors with a one-year investment horizon:
a. 1985
b. 1989
c. 1995
d. 1999
e. 2005