Hors d'Age Cheeseworks has been paying a regular cash dividend of $4.5 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 99,000 shares outstanding selling for $81 per share. The company has sufficient cash on hand to pay the next annual dividend. Suppose that, starting in year 1, Hors d'Age 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 c. Project future stock prices for both the old and new policies for years 1, 2, and 3. Price year 1 Price year 2 Price year 3
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
![### Hors d’Age Cheeseworks: Stock Repurchase Analysis
#### Background:
Hors d’Age Cheeseworks has been paying a regular cash dividend of $4.5 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 99,000 shares outstanding selling for $81 per share. The company has sufficient cash on hand to pay the next annual dividend.
Suppose that, starting in year 1, Hors d’Age decides to cut its cash dividend to zero and announces that it will repurchase shares instead.
### Analysis:
**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.
- Yes
- No
**b. How many shares will Hors d’Age purchase?**
- Number of shares: [_____]
**c. Project future stock prices for both the old and new policies for years 1, 2, and 3.**
| | Year 1 | Year 2 | Year 3 |
|---------|------------------|------------------|------------------|
| Price | [_____] | [_____] | [_____] |
Please input the required values based on your analysis and understanding of the company’s financial strategy and market behavior. This exercise aims to provide insights into the potential impact of dividend policy changes on stock prices and share repurchase decisions.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F20cd1cd6-40bf-4cbe-8dba-a18817c6a027%2F0b8dd3c4-ea58-4e32-9553-efb9313a62ac%2F4xr3i6_processed.png&w=3840&q=75)
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 2 images
