Ample Textiles Ltd. has 50 million shares outstanding. The earnings per share for this year are Rs.6.2 and the firm's target payout ratio is 50%. Ample Textiles plans to pay the entire dividend at the end of this year. The share price at the end of the year (before dividend payment) is Rs.140. Assume that there are no corporate or personal taxes. 

(i.) Calculate Ample Textiles' share price after the dividend has been paid out. 

(ii.) Take a scenario where the company cancels the planned dividend payment and announces that it will instead use the cash that was earlier earmarked for dividend payment to repurchase the shares. How will the share price change assuming that investors obtain no new information regarding the company from the announcement? How many shares will the company need to repurchase? 

(iii.) Take a scenario where the company does not cancel the dividends. It instead announces an increase in the payout ratio from 50% to 100%. The company also issues new shares to replenish the extra cash that was paid out as dividends. 

Calculate the cum-dividend and ex-dividend share price. How many shares will the company need to issue? 

Assume that investors obtain no new information regarding the company from the announcement?

Answer rating: 100% (QA)

i To calculate the share price after the dividend has been paid out we first need to determine the amount of dividend per share Since the earnings per share are Rs62 and the payout ratio is 50 the div... View the full answer