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Lecture 2

COMM 122 Lecture 2: Assignment 2

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Queen's University
COMM 122
Evan Dudley

1. Per share stock price would decrease by the value of the dividend divided by total number of outstanding shares on the ex-dividend date. The value of the company would decrease by the total value of the dividend on the ex-dividend date. If $30 million were issued as a dividend to 1 million shares outstanding, the share price would decrease by $30 per share on the ex-dividend date. The value of the firm would decrease by $30 million on the ex-dividend date. Shareholder value will not be affected. 2. Depending on Electronic Timing Ltd.’s current leverage, paying off debt could either decrease firm value or increase firm value depending on the current position of the firm in relation to its optimal capital structure. Expanding its manufacturing capability could also either increase or decrease the value of the firm depending on whether the project has a positive or negative NPV. If the expansion project’s NPV is positive, then firm value would increase and vice versa. 3. The P/E ratio would increase because the number of shares (denominator) decreases. Return on assets would be unchanged because both net income and total assets remain const
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