A firm has $500 million of assets that includes $50 million of cash and 10 million shares outstanding.The firm uses $50 million of its cash to pay dividends.If an investor has 1000 shares,how many shares must he sell to create a homemade dividend of $6575.

Question

Quizplus · Accepted Answer

The initial cash per share is $5, calculated by dividing the $50 million cash by the 10 million shares outstanding.

After the dividend payment of $50 million, the firm will have $0 cash per share, thus reducing the overall value of the firm.

To create a homemade dividend of $6575, the shareholder needs to sell shares to raise the necessary funds.

The amount raised per share is $6575/1000 shares = $6.575 per share.

Thus, the number of shares that need to be sold is $50 million / $6.575 per share = 761421 shares.

To maintain the same number of shares as before, the shareholder needs to sell 761421 - 1000 = 760421 shares.

Therefore, the investor needs to sell approximately 760 shares, which is equivalent to 0.0076% of the outstanding shares or 0.076% of their total shares.

The closest answer choice to this value is C, 35 shares.

A Firm Has $500 Million of Assets That Includes $50