lecture6_SolutionsApplicationsSlides.pdf - Solutions to Applications in Slides Lecture 6 Michael Hasler Application 1 1 Equity value after the share

lecture6_SolutionsApplicationsSlides.pdf - Solutions to...

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Solutions to Applications in Slides: Lecture 6Michael HaslerApplication 11. Equity value after the share repurchase must be identical to equity value after div-idend payment (in both cases,Fpays out 500,000).Therefore total equity valuepost share repurchase would have been 3 million.Fspends 500’000 to repurchasenshares.Hence repurchase price is500,000n.Thismust be equal to equity value post repurchase divided by post repurchase numberof stocks outstanding.Therefore500,000n=3,000,000100,000-nn= 14,2862. Substitutingnin the expressions above, the repurchase price, which is equal to thevalue of a stock after the share repurchase is 35. Therefore shareholders end up witha wealth of 35 per stock, whatever the form of the payout.Application 2In the first case, the dividend per stock is 10 per year. Therefore the value of onestock is simply 10/10% = 100In the second case, the first step is to compute the number of stocksFneeds to issueto raise the additional 2 million it wants to pay out the first year. Letndenote thatnumber.F’s equity value in year 1 (after dividend payment) is 1/10% = 10 million.The following must hold: Price at which F issues = Value stock after issuanceTherefore2,000,000n=10,000,000100,000 +nn= 25,000From year 2 on, dividend per stock is 1,000,000/125,000 = 8. Therefore, the value
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