Hors d’Age Cheeseworks has been paying a regular cash dividend of $4.80 per share each year...

80.2K

Verified Solution

Question

Finance

Hors d’Age Cheeseworks has been paying a regular cash dividendof $4.80 per share each year for over a decade. The company ispaying out all its earnings as dividends and is not expected togrow. There are 111,000 shares outstanding selling for $80 pershare. The company has sufficient cash on hand to pay the nextannual dividend at t = 1.
Suppose that, starting in year 1, Hors d’Age decides to cut itscash dividend to zero and announces that it will repurchase sharesinstead.
a. What is the immediate stock price reaction?Ignore taxes, and assume that the repurchase program conveys noinformation about operating profitability or business risk.
Increase
Decrease
Remain the same
b. How many shares will Hors d’Age purchase?(Round your answer to the nearest wholenumber.)
Number of shares repurchased
c. Project and compare future stock prices forthe old and new policies. (Do not round intermediatecalculations. Round your old policy answers to the nearest wholenumber and your new policy answers to 2 decimalplaces.
Share Price
Year Old Policy New Policy
1 $ $
2 $ $
3 $ $

Answer & Explanation Solved by verified expert

3.7 Ratings (614 Votes)

a If we ignore taxes and there is no information conveyed by the repurchase when the repurchase program is announced then share price will remain at 80 b The regular dividend has been 480 per share and so the company has 480 x 111000 532800 cash on hand Since the share price is 80 the company See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Hors d’Age Cheeseworks has been paying a regular cash dividendof $4.80 per share each year for over a decade. The company ispaying out all its earnings as dividends and is not expected togrow. There are 111,000 shares outstanding selling for $80 pershare. The company has sufficient cash on hand to pay the nextannual dividend at t = 1.Suppose that, starting in year 1, Hors d’Age decides to cut itscash dividend to zero and announces that it will repurchase sharesinstead.a. What is the immediate stock price reaction?Ignore taxes, and assume that the repurchase program conveys noinformation about operating profitability or business risk.IncreaseDecreaseRemain the sameb. How many shares will Hors d’Age purchase?(Round your answer to the nearest wholenumber.)Number of shares repurchased c. Project and compare future stock prices forthe old and new policies. (Do not round intermediatecalculations. Round your old policy answers to the nearest wholenumber and your new policy answers to 2 decimalplaces.Share PriceYearOld PolicyNew Policy1$$2$$3$$