question archive Natsam Corporation has $250 million of excess cash
Natsam Corporation has $250 million of excess cash
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Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $15 per share. Natsam’s board has decided to pay out this cash as a one-time dividend.
What is the ex-dividend price of a share in a perfect capital market?
If the board instead decided to use the cash to do a one-time share repurchase, in a perfect capital market, what is the price of the shares once the repurchase is complete?
In a perfect capital market, which policy in part (a) or (b) makes investors in the firm better off?
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Answer:
A perfect capital market is the one in which there is no scope for arbitrage.
dividend per share = $250 million / 500 million
= $0.5
The ex-dividend price per share = $15 - $0.5 = $14.5
The price of the shares after the repurchase would be the same $15
Both the policies would fetch the same results to the investors. There wealth would remain same i.e $15 per share.
