A firm has $400 million of assets that includes $50 million of cash and 10 million shares outstanding. The firm uses $40 million of its cash to pay dividends. If an investor has 1 000 shares, how many shares must she sell to create a homemade dividend of $4 900?

Question

Quizplus · Accepted Answer

After paying $40 million in dividends, the firm will have $10 million in cash remaining.

To create a homemade dividend of $4,900, the investor needs to generate additional cash income of $4,900.

The investor can do this by selling some of her shares.

To determine how many shares the investor needs to sell, first calculate the total cash generated from the sale of those shares:

Total cash generated = Homemade dividend + remaining cash = $4,900 + $10,000,000 = $10,004,900

Next, calculate the price per share:

Price per share = Total assets / Number of shares outstanding 
Price per share = $400 million / 10 million shares 
Price per share = $40

Finally, calculate how many shares the investor needs to sell:

Number of shares sold = Total cash generated / Price per share 
Number of shares sold = $10,004,900 / $40 
Number of shares sold = 250,122.5

The investor cannot sell a fraction of a share, so she must sell 250,123 shares.

Therefore, the correct answer is C) 25 shares (250,123 shares would generate too much cash).

A Firm Has $400 Million of Assets That Includes $50