Dividend Policy

1. What options does a firm have to spend its free cash flow (after it
has satisfied all interest obligations)?

Reten
er

Caja

reinver
tir

Payout
(distribui
r)
Dividend
os

recomp
ra

2. ABC Corporation announced that it will pay a dividend to all

shareholders of record as of Monday, April 3, 2006. It takes three
business days of a purchase for the new owners of a share of stock to
be registered
a. When is the last day an investor can purchase ABC stock and
still get the dividend payment?
El precio de la accin es afectado hasta un da antes de la compra
(30/03).
b. When is the ex-dividend day?
Ex-dividend date = payment day business days of stock to be
registered = 31/03
For sales before this date, the dividend belongs to the new owner; for
sales on or after the date, the seller is entitled to the dividend.
3. RFC Corp. has announced a $1 dividend. If RFCs price last price
cum-dividend is $50, what should its first ex-dividend price be
(assuming perfect capital markets)?
price cum-dividend = ultimo da previo al ex-dividend date
Price ex-dividend = 50-1=49
4. EJH Company has a market capitalization of $1 billion and 20 million
shares outstanding. It plans to distribute $100 million through an
open market repurchase. Assuming perfect capital markets:

a. What will the price per share of EJH be right before the
repurchase?
MK / SO = 1,000 M / 20 M = PRECIO POR ACCION ANTES DE LA
RECOMPRA = $50
b. How many shares will be repurchased?
Distribute $ 100 M / PRECIO ACCION = $ 100 M / 50 = 2M
c. What will the price per share of EJH be right after the
repurchase?
(MK REPURCHASE) / (ACCIONES TOTALES - ACCIONES RECOMPRADAS)
= (1000-100) / (20M/2M) = 50
5 KMS Corporation has assets with a market value of $500 million, $50
million of which are cash it has debt of $200 million, and 10 million
shares outstanding. Assume perfect capital markets.
a. What is its current stock price?
(500 200)/10 = $30
b. If KMS distributes $50 million as a dividend, what will its share
price be after the dividendis paid?
(500 200 - 50)/10 = $25
c. If instead, KMS distributes $50 million as a share repurchase,
what will its share price be once the shares are repurchased?
(500 200 - 50)/(10 50/30) = $30
d. What will its new market debt-equity ratio be after either
transaction?
Para a: D/E = 200/300
Para b: D/E = 200/250
Para c: D/E = 200/250
6. 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. Natsams 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?
Market gap = 500 x 15 = 7500
(MG excess cash)/shares outstanding = (7500-250)/500 = $14.50

7. The HNH Corporation will pay a constant dividend of $2 per share,

per year, in perpetuity. Assume all investors pay a 20% tax on
dividends and that there is no capital gains tax. Suppose that other
investments with equivalent risk to HNH stock offer an after-tax
return of 12%.
a. What is the price of a share of HNH stock?

P=

2 (10.2 )
12

b. Assume that management makes a surprise announcement that

HNH will no longer pay dividends but will use the cash to
repurchase stock instead. What is the price of a share of HNH
stock now?

P=

2
=16.7
12

8. Berkshire Hathaways A shares are trading at $120,000. What split

ratio would it need to bringits stock price down to $50?
Es la accin ms cara del mundo. Es un consorcio de empresas.

Precio antiguo 120,000

=
=24 /1
Precio nuevo
50

9. Suppose the stock of Host Hotels & Resorts is currently trading for
$20 per share.
a. If Host issued a 20% stock dividend, what will its new share
price be?
Suponemos el nmero de acciones como n = 100
Entonces 20% de acciones divididas 20 acciones adicionales

P=

20 x 100
=16.67 x accin
120

b. If Host does a 3:2 stock split, what will its new share price be?
3:2

P=

20
2
=20 x =13.3 x accin
3
3
2

c. If Host does a 1:3 reverse split, what will its new share price be?
1:3

P=

20
=20 x 3=60 x accin
1
3