(2) A company has been reliably following a policy of one annual dividend payment of 5$ per share, where all earnings are distributed. The company does not grow and there are 200,000 shares priced at $60. This year, the company decides to use its earnings to repurchase shares instead of issuing a dividend. There are no taxes and no conclusions can be drawn on profitability or business risk from the decision. The number of stocks is rounded at the unit digit.

(i) What happens to the stock price immediately after the decision is announced, and how many shares will be repurchased?

(ii) Project the stock prices and annual rates of return for stockholders under each policy in the future and discuss your findings. When will the share price exceed $1000 for the repurchase policy? When will the company be left with no shares (rounded to unit) to be repurchased?

Answer rating: 100% (QA)

i Immediate Impact of the Decision When the company announces its decision to repurchase shares instead of issuing a dividend the stock price is expec... View the full answer