solution

Consider a firm whose board of directors just announced a cash dividend of $100 million to
be paid tomorrow. For valuation purposes, ignore this one day period. After this payout,
the firm will have assets worth $1000 million and 10 million shares. The firm’s cost of capital
is 10%. Ignore corporate and personal taxes. The firm has no debt.
(a) What is the firm’s share price before the dividend is paid?
(b) What is the firm’s share price after the dividend payment (i.e. the ex-dividend price)?
(c). Suppose that instead of paying out all cash as a single dividend at once, the board
announces that it will pay quarterly dividends, with a first dividend of $25 million to
be paid the day after the announcement. What is the firm’s share price after the first
dividend payment in this case? Assume that unpaid earnings are reinvested back into
the firm’s operations.