Use the following information to answer the question(s)below.
Wyatt Oil has assets with a market value of $600 million,$70 million of which are cash.It has debt of $250 million,and 20 million shares outstanding.Assume perfect capital markets.
-If Wyatt Oil distributes the $70 million as a dividend,then its stock price after the dividend will be closest to:
A)$12.50.
B)$14.00.
C)$17.50.
D)$26.50.

Question

Quizplus · Accepted Answer

The market value of Wyatt Oil's equity is currently $600 million - $250 million = $350 million. 
If the company distributes $70 million as a dividend, the market value of its equity will remain unchanged, but the cash on its balance sheet will decrease by $70 million. This means the total value of the assets held by the company will decrease to $530 million ($600 million - $70 million). 
Since there are 20 million shares outstanding, the new stock price will be $530 million/20 million = $26.50. However, since we are only interested in the closest option, the answer is B) $14.00.

Use the Following Information to Answer the Question(s)below