A firm has a market value equal to its book value. Currently,the firm has excess cash of $500 and other assets of $9,500. Equity is worth $10,000. The firm has 250 shares of stock outstanding and net income of $1,400. What will the stock price per share be if the firm pays out its excess cash as a cash dividend?

Question

Quizplus · Accepted Answer

The book value per share can be calculated as:
Book value = (Total Assets - Total Liabilities) / Number of Shares
Book value = ($9,500 + $500 - 0) / 250 = $40
Since the market value is also $40 per share, there is no goodwill or premium on the stock price.
If the firm pays out the excess cash of $500 as a dividend, then the total equity will reduce to $9,500 and the book value per share will be:
Book value = ($9,500 - 0) / 250 = $38
Since the market value is equal to the book value, the stock price will also be $38 per share. Therefore, the correct answer is B.

A Firm Has a Market Value Equal to Its Book