Clovix Corporation has $43 million in cash, 11 million shares outstanding, and a current share price of

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Clovix Corporation has $43 million in cash, 11 million shares outstanding, and a current share price of $25. Clovix is deciding whether to use the $43 million to pay an immediate special dividend of $3.91 per share, or to retain and invest it at the risk-free rate of 10% and use the $4.30 million in interest earned to increase its regular annual dividend of $0.39 per share. Assume perfect capital markets.

a. Suppose Clovix pays the special dividend. How can a shareholder who would prefer an increase in the regular dividend create it on her own?

b. Suppose Clovix increases its regular dividend. How can a shareholder who would prefer the special dividend create it on her own?

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Corporate Finance The Core

ISBN: 9781292158334

4th Global Edition

Authors: Jonathan Berk, Peter DeMarzo

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