Question

(i) The equity of John Blunt limited have a total market value of $86,000. Currently, Blunt limited has excess cash of $6,000 and a net income of $67,000. There are 1,500 shares of stock outstanding. What will be the percentage change in the stock price per share if the firm pays out all of its excess cash as a cash dividend?

Answer 1

6.98%

Step-by-step explanation:

Blunt's total market value = $86,000

stocks outstanding = 1,500

market value per share = $86,000 / 1,500 = $57.33

excess cash = $6,000

excess cash per share = $6,000 / 1,500 = $4

if excess cash is distributed, the price per share will decrease by $4 or by $4 / $57.33 = 6.98%

if instead of distributing excess cash among stockholders, the company repurchased treasury stock, then the stock price would probably increase, instead of decreasing.