KMS Corporation has assets with a market value of ?$571?million, ?$47 million of which are cash. It has debt of ?$183?million, and 11 million shares outstanding. Assume perfect capital markets.

a. What is its current stock? price?

b. If KMS distributes ?$47 million as a? dividend, what will its share price be after the dividend is? paid?

c. If? instead, KMS distributes ?$47 million as a share?repurchase, what will its share price be once the shares are?repurchased?

d. What will its new market? debt-equity ratio be after either?transaction?

Answer:

Part a:

Market value of assets-Liabilities=Equity
Share price=(Market value of assets-Liabilities)/Number of shares outstanding
Given that, market value of assets=$571 million
Liabilities is given by the debt amount of $183 million
Number of shares outstanding= 11 million
From the given information, current share price of the company is calculated as:
So, current share price=($571-$183)/11=$388/11=$35.27

Part b:
Given that, market value of assets=$571 million
Liabilities is given by the debt amount of $183 million
Given that KMS has distributed dividend amount of ?$47 million.
Number of shares outstanding= 11 million
The share price value after the dividend is paid is calculated as:
Market value of assets - Reduction in assets-Liabilities=Equity
Share price=(Market value of assets-Reduction in assets due to dividend distribution-Liabilities)/Number of shares outstanding
=($571-$47-$183)/11=$341/11=$31

Part c:
Now, KMS distributes ?$47 million as a share? repurchase.
Given that, market value of assets=$571 million
Liabilities is given by the debt amount of $183 million
Number of shares outstanding= 11 million
Market value of assets - Reduction in assets-Liabilities=Equity
Share price=(Market value of assets-Reduction in assets due to share repurchase-Liabilities)/Number of shares outstanding
Number of shares repurchased=Amount distributed for share repurchase/Share price=?$47million/$35.27=1.3326 million
Note: We got the amount $35.27 from answer to the question a.
Now, number of shares outstanding=(Total share outstanding before share repurchase-number of shares repurchased)=(11-1.3326)=9.6674 million

Share price=($571-$47-$183)/9.6674=$341/9.6674=$35.273

Part d:
Market value of assets-Reduction in assets-Liabilities=Equity
After either reduction, ?the reduction in assets will be equal to $47 million
Given that, market value of assets=$571 million
Liabilities is given by the debt amount of $183 million
Market value of assets-Reduction in assets due to share repurchase-Liabilities=Equity=$571-$47-$183=$341
So, equity is $341 million and debt is $183 million.
Therefore, debt to equity ratio =$183/$341=0.53666