Bobaflex net worth

BCO222 BUSINESS FINANCE II WEEK 4: FINANCIAL LEVERAGE, CAPITAL STRUCTURE AND DIVIDEND POLICY ILLUSTRATION EXAMPLE 1: CASH DIVIDENDS The balance sheet for Sinking Ship Corp. is shown here in market value terms. There are 14,000 shares of stock outstanding. The company has declared a cash dividend of $1.30 per share. The stock goes ex dividend tomorrow. Ignoring any tax effects, what is the stock selling for today? What will it sell for tomorrow? What will the balance sheet look like after the dividends are paid? SOLUTION: The stock price is the total market value of equity divided by the shares outstanding, so: P0 = $438,700 equity / 14,000 shares = $31.34 per share Ignoring tax effects, the stock price will drop by the amount of the dividend, so: PX = $31.34 – 1.30 = $30.04 The total dividends paid will be: $1.30 per share x 14,000 shares = $18,200 The equity and cash accounts will both decline by $18,200. ILLUSTRATION EXAMPLE 2: SHARE REPURCHASE The balance sheet for Sinking Ship Corp. is shown here in market value terms. There are 14,000 shares of stock outstanding. Suppose the company has announced it is going to repurchase $18,200 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be outstanding? What will the price per share be after the repurchase? SOLUTION: Repurchasing the shares will reduce cash and shareholders’ equity by $18,200. The shares repurchased will be the total purchase amount divided by the stock price, so: Shares bought = $18,200/$31.34 = 580.81 And the new shares outstanding will be: New shares outstanding = 14,000 – 580.81 = 13,419.19 After repurchase, the new stock price is: Share price = ($438,700 – 18,200)/13,419.19 shares = $31.34 The repurchase is effectively the same as the cash dividend because you either hold a share worth $31.34, or a share worth $30.04 and $1.30 in cash. Therefore, if you participate in the repurchase according to the dividend payout percentage, you are unaffected. ILLUSTRATION EXAMPLE 3: CASH DIVIDENDS VS. SHARE REPURCHASE The balance sheet for Bobaflex Manufacturing is shown here in market value terms. There are 12,000 shares of stock outstanding. Part I. Cash Dividend The stock of a company will go ex-dividend tomorrow. The cash dividend will be $2.50 per share. Calculate the following: 1. What is the stock selling for today? 2. What will it sell for tomorrow? Ignore tax effects. 3. What will the balance sheet look like after the dividends are paid? Part II. Share Repurchase Suppose that instead of cash dividend, the company has announced t h a t it is going to repurchase $30,000 worth of stock. Calculate the following: 1. What effect will this transaction have on the equity of the firm? 2. How many shares will be outstanding? 3. What will the price per share be after the repurchase? SOLUTION: Part I. Cash Dividend 1. The stock price is the total market value of equity divided by the shares outstanding, so: Po = $508,000 equity/12,000 shares = $42.33 per share 2. Ignoring tax effects, the stock price will drop by the amount of the dividend, so: Px = $42.33 – 2.50 = $39.83 3. The total dividends paid will be: $2.50 per share x 12,000 shares = $30,000 The equity and cash accounts will both decline by $30,000. Part II. Share Repurchase 1. Repurchasing the shares will reduce cash and shareholders’ equity by $30,000. 2. The shares repurchased will be the total purchase amount divided by the stock price, so: Shares bought = $30,000/$42.33 = 708.72 New shares outstanding = 12,000 – 708.72 = 11,291.28 3. After repurchase, the new stock price is: (508,000 – 30,000)/11,291.28 shares = $42.33 The repurchase is effectively the same as the cash dividend because you either hold a share worth $42.33, or a share worth $39.83 and $2.50 in cash. Therefore, if you participate in the repurchase according to the dividend payout percentage, you are unaffected. ...