Problem 3 (30 points)

Suppose B&E Press paid dividends at the end of each year according to the schedule below. It also reduced its share counts by repurchasing 5 million shares at the end of each year at the ex-dividend stock prices shown.

Ex-Dividend Stock Price ($/share)

(2009) 10.00

(2010) 12.00

(2011) 8.00

(2012) 11.00

(2013) 15.00

Dividend ($/share)

(2009) 0

(2010) 0.50

(2011) 0.50

(2012) 0.50

(2013) 0.50

Share Outstanding (millions)

(2009) 100

(2010) 95

(2011) 90

(2012) 85

(2013) 80

a)What is the total market value of B&E's equity, and what is the total amount paid out to shareholders, at the end of each year?

b)If B&E had made the same total payouts using dividends only (and so kept its share count constant), what dividends would it have paid and what would its ex-dividend share price have been each year?

c)If B&E had made the same total payouts using repurchases only (and so paid no dividends), will the share price in each year higher or lower than your answers in part b)?

d)Consider a shareholder who owns 10 shares of B&E initially, does not sell any shares, and reinvests all dividends at the ex-dividend share price. Would this shareholder have preferred the payout policy in (b), (c), or the original policy?