Fundametals of Corporate Finance 3rd ed Jonathan Berk Ch17.docVIP

Chapter 17Payout Policy Note: All problems in this chapter are available in MyFinanceLab. An asterisk (*) indicates problems with a higher level of difficulty. 1. Plan: Determine the ex-dividend day and the last day that an investor can purchase the stock and receive the dividend. The last day to buy and still get the dividend must be three business days before the record date. The record date is Monday, April 5, 2010. The ex-dividend day is the first day that buying the stock will not entitle you to the dividend. Execute: a. April 1 b. March 31 Evaluate: An investor who purchases the stock on April 1 will receive the dividend; an investor who purchases the stock on April 2 will not receive the dividend. 2. Plan: Calculate the first ex-dividend day price. Execute: Assuming perfect markets, the first ex-dividend price should drop by exactly the dividend payment. Thus, the first ex-dividend price should be $49 per share. Evaluate: In a perfect capital market, the first price of the stock on the ex-dividend day should be the closing price on the previous day less the amount of the dividend. 3. Plan: ECB has a market capitalization of $20 million ($20 ( 1 million shares). If it repurchases shares at the market price, it will need to pay $20 ( 100,000 ? $2 million. Execute: Its new market capitalization will be $18 million. (It started with $20 million and distributed $2 million through the repurchase.) Its share price will stay at $20 ($18 million/900,000 shares). Evaluate: As long as the company repurchases its shares at the market price, the price will not change after the repurchase. This is because buying shares at the market price is a zero-NPV investment—it has neither created nor destroyed value. 4. Plan: Compute the changes in the balance sheet and determine the new leverage ratio. Execute: a. Both the cash balance and shareholder equity will drop by $20 million. b. After the repurchase, equity will be $280 million, and debt is still $200