In the previous problem, suppose the company has announced it is going to repurchase $30,000 worth of stock instead of paying a dividend. What effect will this transaction have on the equity of the firm? How many shares will be outstanding? What will the price per share be after the repurchase? Ignoring tax effects, show how the share repurchase is effectively the same as a cash dividend.

Data from Problem 7

The balance sheet for Price Cut, Inc., is shown here in market value terms. There are 25,000 shares of stock outstanding.

The company has declared a dividend of $1.20 per share. The stock goes ex-dividend tomorrow. Ignoring any tax effects, what is the stock selling for today? What will it sell for tomorrow? What will the balance sheet look like after the dividends are paid?

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Market Value Balance Sheet $110,000 480,000 Cash Equity Total $590,000 Fixed assets Total $590,000 $590,000