BD3_SM17
3
Chapter 17/Payout Policy 1 Chapter 17 Payout Policy 17-3. Desc ribe t he di ffer ent mechan isms a vaila ble t o a firm to us e to re pur chas e shar es There are three mechanisms. 1) In an open-market repurchase, the firm repurchases the shares in the open market. This is the most common mechanism in the United tates. !) In a tender offer the firm announces the intention to all shareholders to repurchase a fi"ed num#er of shares for a fi"ed price, conditional on shareholders a$reein$ to tender their shares. If not enou$h shares are tendered, the deal can #e cancelled. %) & tar$eted repurchase is similar to a tender offer e"cept it is not open to all shareholders' only specific shareholder can tender their shares in a tar$eted repurchase. 17- 4. RFC Corp. has announced a 1 divi dend. !f RFC"s price last price cum-di vid end is #$% &hat should its first e'-dividend price be (assumin) perfect capital mar*ets+, &ssumin$ perfect markets, the first e"-di(id end price should drop #y e"actl y the di(idend payment. Thus, the first e"-di(idend price should #e *+ per share. In a perfect capital market, the first price of the stock on the e"-di(idend day should #e the closin$ price on the pre(ious day less the amount of the di(idend. 17-#. / Company has a mar* et capi tal i0ation of 1 bill ion and $ mil lio n shar es outstandin). !t plans to distribute 1$$ million throu)h an open mar*et repurchase. 2ssumin) perfect capital mar*ets a. hat &i ll the pr ice per s hare o f / be ri) ht before the r epu rch ase, b. /o& many s hares &ill be r epur chase d, c. hat &ill t he price per share of / b e ri)h t afte r the r epu rch ase, a. 1 #illi on/ ! mi llio n share s per s har e. #. 1 million/ per share ! million shares. c. If mark ets are per fec t, then the pric e ri$ht af ter the repurc has e shoul d #e the same as the pri ce immediately #efore the repurchase. Thus, the price il l #e per share. 17-5. 68 Corpo ratio n has as sets &ith a mar*e t value o f #$$ milli on% #$ milli on of &h ich ar e cash . !t has debt of $$ million% and 1$ million shares outstandin). 2ssume perfect capital mar*ets. a. hat i s it s current st oc* pri ce , b. !f 68 d istribute s #$ million as a divid end% &hat &ill its s hare pric e be after the divid end is paid, c. !f inste ad% 68 distr ibut es #$ mill ion as a share re purc hase % &hat &il l its share pr ice be once the shares are repurchased, d. hat &i ll its ne& mar*et debt-e 9uit y ratio be afte r eithe r trans acti on, a. 0 ! )/1 % 2!1* Pearson 3ducation, Inc.
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Transcript of BD3_SM17
7/25/2019 BD3_SM17
http://slidepdf.com/reader/full/bd3sm17 1/3
Chapter 17/Payout Policy 1
Chapter 17
Payout Policy
17-3. Describe the different mechanisms available to a firm to use to repurchase shares
There are three mechanisms. 1) In an open-market repurchase, the firm repurchases the shares in theopen market. This is the most common mechanism in the United tates. !) In a tender offer the firmannounces the intention to all shareholders to repurchase a fi"ed num#er of shares for a fi"ed price,conditional on shareholders a$reein$ to tender their shares. If not enou$h shares are tendered, the dealcan #e cancelled. %) & tar$eted repurchase is similar to a tender offer e"cept it is not open to all
shareholders' only specific shareholder can tender their shares in a tar$eted repurchase.
17-4. RFC Corp. has announced a 1 dividend. !f RFC"s price last price cum-dividend is #$% &hat
should its first e'-dividend price be (assumin) perfect capital mar*ets+,
&ssumin$ perfect markets, the first e"-di(idend price should drop #y e"actly the di(idend payment.Thus, the first e"-di(idend price should #e *+ per share. In a perfect capital market, the first price of the stock on the e"-di(idend day should #e the closin$ price on the pre(ious day less the amount of thedi(idend.
17-#. / Company has a mar*et capitali0ation of 1 billion and $ million shares outstandin). !t
plans to distribute 1$$ million throu)h an open mar*et repurchase. 2ssumin) perfect capital
mar*ets
a. hat &ill the price per share of / be ri)ht before the repurchase,
b. /o& many shares &ill be repurchased,
c. hat &ill the price per share of / be ri)ht after the repurchase,
a. 1 #illion/! million shares per share.
#. 1 million/ per share ! million shares.
c. If markets are perfect, then the price ri$ht after the repurchase should #e the same as the priceimmediately #efore the repurchase. Thus, the price ill #e per share.
17-5. 68 Corporation has assets &ith a mar*et value of #$$ million% #$ million of &hich are cash.
!t has debt of $$ million% and 1$ million shares outstandin). 2ssume perfect capital mar*ets.
a. hat is its current stoc* price,
b. !f 68 distributes #$ million as a dividend% &hat &ill its share price be after the dividend is
paid,
c. !f instead% 68 distributes #$ million as a share repurchase% &hat &ill its share price be
once the shares are repurchased,
d. hat &ill its ne& mar*et debt-e9uity ratio be after either transaction,
a. 0 !)/1 %
2!1* Pearson 3ducation, Inc.
7/25/2019 BD3_SM17
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7/25/2019 BD3_SM17
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