Problem $5$: Using the information from problem $3$ below, suppose the firm announces it is going to repurchase $$12,500$ worth of stock. What effect will this transaction have on the equity of the company? How many shares will be outstanding? What will the price per share be after the repurchase? Ignoring tax effects, show how the share repurchase is effectively the same as a cash dividend.

Problem $3$: The balance sheet of a firm in market value terms is shown below. There are $10,000$ shares of stock outstanding. Market Value Balance Sheet Cash $$50,000$ Equity $$400,500$ Fixed Assets $350,500$ Total $$400,500$ Total $$400,500$ The firm has declared a dividend of $$1\mathrm{.}25$ per share.

If the stock goes ex$-$dividend tomorrow, ignoring any tax effects:

What is the stock selling for today? $$400,500/10,000=$ $$40\mathrm{.}05$

What will it be selling for tomorrow? $$40\mathrm{.}05-$ $$1\mathrm{.}25=$ $$38\mathrm{.}80$

What will the balance sheet look like after the dividends are paid?

Cash: $$1\mathrm{.}25$ x $10,000=$$$12,500$ $$50,000-$ $$12,500=$ $$37,500$ Equity: $$400,500-$ $$12,500=$ $$388,000$