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 firms common stock, and the company chooses Alternative 2 to repurchase its own stock: a)Show with calculations that in absence of personal taxes and transaction costs, your wealth will be the same before and after the repurchase. b)What will you do to create home-made dividend for yourself because the company did not pay out dividends under Alternative 1? In order to create a self-made dividend, we have to sell part of our own investment, and the profits form that are treated as home made dividend.