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Manal Elkhoshkhany
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B1. (Cash versus homemade dividends) Refer to Figures 18-4

Customer Question

B1. (Cash versus homemade dividends) Refer to Figures 18-4 and 18-5. A firm currently has 8,000 shares outstanding that are worth $100 each. The firm’s shareholders desire a dividend of $20 per share. Assume a perfect capital market.
a. Suppose the firm pays a dividend of $20 per share and sells new shares to raise $160,000 to replace the cash it paid out. Show that these steps do not alter the wealth of the original shareholders. What percentage of the firm do the original shareholders end up owning?
b. Suppose instead the shareholders raise $160,000 by selling some of their own shares.
How many shares must they sell? Show that the two dividend alternatives leave them equally well-off.

B8. (Greenmail) The common stock of Trans-World-Dilemma (TWD) has a current price of $30 per share. If TWD has 10 million shares outstanding and it buys back 1 million shares from Karl I. Can, paying Karl $35 per share for the block of shares:

a. What should be the firm’s share price immediately following the buyback?
b. How has the payment of greenmail affected the holders of the other 9 million shares?
Submitted: 5 years ago.
Category: Finance
Expert:  Manal Elkhoshkhany replied 5 years ago.

Hello Customer


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