solution

The Balance Sheet for Impian Rian Berhad is shown below in the market value term. There are 15,000 shares of stock outstanding. Market Value Balance Sheet RM610,00 0 Equity Cash Fixed assets RM140,000 470,000 RM610,00 0 Total RM610,000 Total The company has declared a dividend of RM1.20 per share. The stock goes ex-dividend tomorrow. i. Ignoring any tax effects, what is the stock selling today? (3 Marks) ii. What will it sell for tomorrow? (3 Marks) iii. What will the balance sheet look like after the dividends are paid? (5 Marks) iv. Suppose Impian Rian has announced it is going to repurchase RM18,000 worth of stock instead of paying a dividend. a) What effect will this transaction have on the equity of the firm? (5 Marks) b) How many shares will be outstanding? (5 Marks) c) What will be the price per share after repurchase? (4 Marks) d) Ignoring tax effects, show how the share repurchase is effectively the same as a cash dividend. The repurchase is effectively the same as the cash dividend because you either hold a share worth RM40.67, or a share worth RM39.47 and RM1.20 in cash. Therefore, if you participate in the repurchase according to the dividend payout percentage, you are unaffected. (5 Marks) e) Explain why a firm might prefer a stock repurchase rather than an increase in the firm’s regular dividend.