Consider a firm whose board of directors just announced a cash dividend of $80 million to be paid tomorrow. For valuation purposes, ignore this one day period. After this payout, the firm will have assets worth $1000 million and 5 million shares. The firm’s cost of capital is 10%. Ignore corporate and personal taxes. The firm has no debt.

(a) What is the firm’s share price before the dividend is paid?

(b) What is the firm’s share price after the dividend payment (i.e. the ex-dividend price)?

(c) Suppose that instead of paying out all cash as a single dividend at once, the board announces that it will pay quarterly dividends, with a first dividend of $20 million to be paid the day after the announcement. What is the firm’s share price after the first dividend payment in this case? Assume that unpaid earnings are reinvested back into the firm’s operations.

Answer rating: 100% (QA)

To calculate the firms share price before and after the dividend payments you can use the dividend d... View the full answer