Here are key financial data for the company Silverstar Inc.: Earnings per share for 2021 is $5.50, number of shares outstanding is 40 million, target dividend payout ratio is 50%, planned dividend per share is $2.75 and stock price at year-end 2021 is $150. The company plans to pay the entire dividend early in January 2022. Ignore all corporate and personal taxes. 1. What will be House of Herringís stock price after the planned dividend payout? 2. Suppose the company cancels the dividend and announces that it will use the money saved to repurchase shares. What happens to the stock price on the announcement date? How many shares will the company need to repurchase? 3. Suppose that, instead of canceling the dividend, the company increases dividends to $5.50 per share and then issues new shares to recoup the extra cash paid out as dividends. What happens to the with- and ex-dividend share prices? How many shares will need to be issued?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Here are key financial data for the company Silverstar Inc.: Earnings per share for 2021 is $5.50, number
of shares outstanding is 40 million, target dividend payout ratio is 50%, planned dividend per share is
$2.75 and stock price at year-end 2021 is $150.
The company plans to pay the entire dividend early in January 2022. Ignore all corporate and personal
taxes.
1. What will be House of Herringís stock price after the planned dividend payout?
2. Suppose the company cancels the dividend and announces that it will use the money saved to
repurchase shares. What happens to the stock price on the announcement date? How many shares
will the company need to repurchase?
3. Suppose that, instead of canceling the dividend, the company increases dividends to $5.50 per share
and then issues new shares to recoup the extra cash paid out as dividends. What happens to the
with- and ex-dividend share prices? How many shares will need to be issued?
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