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ACTSC 372 – Assignment #4
Due Monday April 2
nd
– noon in the drop boxes
1.
In this question, we will explore the irrelevance of dividend policy.
Suppose XYZ
Inc currently has 1 million shares outstanding, and XYZ expects to make $1 million
per year in perpetuity, all of which is paid out in dividends.
Assume the relevant
discount rate is 10%. (Ignore taxes and transaction costs, and assume the markets are
efficient.)
a.
What is the value of one share of XYZ Inc?
(Assume the next dividend
payment is one year from today.)
b.
Now assume XYZ Inc plans to change its dividend policy as follows:
the
company will skip the next dividend payment and instead it will repurchase $1
million worth of shares.
In year 2, and in all subsequent years, the dividends
will resume and all the income will be paid out as dividends.
What is the
current share price under this policy? Provide an explicit calculation of the
share price given the new dividend payment stream. (Hint: Let P
1
be the share
price at time 1, immediately before the share repurchase.
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 Winter '09
 MARYHARDY

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