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Here are key financial data for House of Herring, Inc.: Earnings per share for 2015 ...................... $5.50 Number of shares

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Here are key financial data for House of Herring, Inc.:

Earnings per share for 2015 ...................... $5.50

Number of shares outstanding ................. 40 million

Target payout ratio ..................................... 50%

Planned dividend per share ...................... $2.75

Stock price, year-end 2015 ........................ $130

House of Herring plans to pay the entire dividend early in January 2016. All corporate and personal taxes were repealed in 2014.

a. Other things equal, what will be House of Herring’s stock price after the planned dividend payout?

b. Suppose the company cancels the dividend and announces that it will use the money saved to repurchase shares. What happens to the stock price on the announcement date? Assume that investors learn nothing about the company’s prospects from the announcement. How many shares will the company need to repurchase?

c. Suppose the company increases dividends to $5.50 per share and then issues new shares to recoup the extra cash paid out as dividends. What happens to the with- and ex-dividend share prices? How many shares will need to be issued? Again, assume investors learn nothing from the announcement about House of Herring’s prospects.


Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...

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Principles of Corporate Finance

Principles of Corporate Finance

ISBN: 978-0077404895

10th Edition

Authors: Richard A. Brealey, Stewart C. Myers, Franklin Allen

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Question Posted: December 31, 2012 09:44:10
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