Neal Fabricators just liquidated its poorest performing division and realized net proceeds from the transaction of $2.6 million. The firm has 180,000 shares of stock outstanding at a market price of $64 a share. Which one of the following is the best estimate of the stock's post-dividend price per share if the firm distributes the entire liquidation proceeds in the form of a liquidating dividend? Ignore taxes and market imperfections.

Question

Quizplus · Accepted Answer

The correct answer is A. The firm's total market value before the liquidation is $11.52 million (180,000 shares x $64 per share). After the liquidation, the firm's total market value will be $14.12 million ($11.52 million + $2.6 million). The new market price per share will be $14.12 million / 180,000 shares = $78.44. However, since the firm is distributing the entire liquidation proceeds in the form of a liquidating dividend, the stock's post-dividend price per share will be $78.44 - $2.6 million / 180,000 shares = $49.56.

Neal Fabricators Just Liquidated Its Poorest Performing Division and Realized