PROBLEM 3: (6 points: 2 points for each part)

An all-equity company has the following year-end market value balance sheet:

Excess cash	$400,000		Debt	$0
Other assets	$3,600,000		Equity	$4,000,000 (80,000 shares at $50 per share)
Total	$4,000,000		Total	$4,000,000

The firm is considering the following alternative uses of excess cash:

Alternative 1: Pay out cash dividends.

Alternative 2: Repurchase its own stock.

Suppose you own 100 shares of the firm's common stock, and the company chooses Alternative 2 to repurchase its own stock:

1. Show with calculations that in absence of personal taxes and transaction costs, your wealth will be the same before and after the repurchase.