1.Whole Foods Donuts , Ltd has generated profits of $2 per share for many years and has consistently paid 100% of those profits to shareholders via a dividend . Investors do not expect Hole Foods Donuts to grow in the future . The company has 200,000 shares of stock outstanding worth $20 per share. Suppose the firm decides to eliminate its dividend and instead use the money to repurchase shares.
Required:
(a)Assuming that there are no taxes and that the repurchase announcement conveys no new information to investors about the profitability or risk of Hole Foods Donuts , how do you think the stock price will react to the announcement ? Provide a written (in words) explanation or a numerical example to provide supports for your answer .
(b)How many shares will Hole Foods Donuts repurchase?
(c)If the signaling argument for repurchases is valid , what stock price would you expect for Hole Foods Donuts one and two years after this announcement ? What would the stock price have been in the next two years if the company had simply maintained its old dividend policy?
1.Whole Foods Donuts , Ltd has generated profits of $2 per share for many years and has consistently paid 100% of those profits to shareholders via a dividend . Investors do not expect Hole Foods Donuts to grow in the future . The company has 200,000 shares of stock outstanding worth $20 per share. Suppose the firm decides to eliminate its dividend and instead use the money to repurchase shares.
Required:
(a)Assuming that there are no taxes and that the repurchase announcement conveys no new information to investors about the profitability or risk of Hole Foods Donuts , how do you think the stock price will react to the announcement ? Provide a written (in words) explanation or a numerical example to provide supports for your answer .
(b)How many shares will Hole Foods Donuts repurchase?
(c)If the signaling argument for repurchases is valid , what stock price would you expect for Hole Foods Donuts one and two years after this announcement ? What would the stock price have been in the next two years if the company had simply maintained its old dividend policy?
