Storm plc has 5,000 shares outstanding and the stock price is £140. The company is expected to pay a dividend of £20 per share next year and thereafter the dividend is expected to grow indefinitely by 5% a year. The president, Jack Mora, 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. The repurchased stock will not be entitled to the dividend. a) Discuss how the announcement affect the value of the company. b) Advise the shareholders should they choose the cash dividends, or the stock repurchase.
Storm plc has 5,000 shares outstanding and the stock price is £140. The company is expected to pay a dividend of £20 per share next year and thereafter the dividend is expected to grow indefinitely by 5% a year. The president, Jack Mora, 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. The repurchased stock will not be entitled to the dividend. a) Discuss how the announcement affect the value of the company. b) Advise the shareholders should they choose the cash dividends, or the stock repurchase.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Storm plc has 5,000 shares outstanding and the stock price is £140. The company is expected to pay a dividend of £20 per share next year and thereafter the dividend is expected to grow indefinitely by 5% a year. The president, Jack Mora, 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. The repurchased stock will not be entitled to the dividend.
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a) Discuss how the announcement affect the value of the company.
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b) Advise the shareholders should they choose the cash dividends, or the stock repurchase.
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