Ajax Inc of Toronto has a market value equal to its book value. Currently, the ﬁrm has excess cash of $2,000 and other assets of $13,000. Equity is worth $15,000. The ﬁrm has 1,000 shares of stock
Outstanding and net income of $2,500. By what percent does the stock price per share change if
The ﬁrm pays out its excess cash as a cash dividend?

Question

Quizplus · Accepted Answer

Currently, the book value per share is calculated as follows:

Book Value per Share = Equity / Number of Shares Outstanding
Book Value per Share = $15,000 / 1,000
Book Value per Share = $15

Since the market value of the stock is also equal to the book value, the current stock price per share is $15.

If the firm pays out its excess cash as a cash dividend, the equity of the firm will decrease by the amount of the dividend. The new equity value will be $13,000, and the number of shares outstanding will remain the same at 1,000.

New Book Value per Share = New Equity / Number of Shares Outstanding 
New Book Value per Share = $13,000 / 1,000 
New Book Value per Share = $13

The new stock price per share can be calculated as follows:

New Stock Price per Share = New Book Value per Share 
New Stock Price per Share = $13

Therefore, the percentage change in the stock price per share is calculated as follows:

Percentage Change in Stock Price per Share = ((New Stock Price per Share - Current Stock Price per Share) / Current Stock Price per Share) x 100%
Percentage Change in Stock Price per Share = (($13 - $15) / $15) x 100%
Percentage Change in Stock Price per Share = -0.1333 x 100%
Percentage Change in Stock Price per Share = -13.33%

The stock price per share decreases by 13.33% if the firm pays out its excess cash as a cash dividend. Therefore, the answer is B) -13.33 percent.

Ajax Inc of Toronto Has a Market Value Equal to Its