What is the agency cost arising from the excess cash

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Reference no: EM132776176

Question - In 2004, the company paid out a special dividend of $16.50 per share using excess cash (they could otherwise earn interest income on cash). The company's stock price and trading volume around the dividend issuance are illustrated by the figure below.

a. The company's stock price increased on the announcement date of the special dividend. Do we expect to see a price increase on the announcement date in the Madigliani-Miller world?

b. The company's stock price decreased on the ex-dividend date of the special dividend. Do we expect to see a price decrease on the ex-dividend date in the Madigliani-Miller world?

c. Can the financial distress cost channel potentially explain the increase in stock price on the announcement date of the special dividend?

d. Can the tax channel potentially explain the increase in stock price on the announcement date of the special dividend?

e. Can the agency costs (i.e. manager-shareholder conflicts) channel potentially explain the increase in stock price on the announcement date of the special dividend?

f. The stock price increased by $10 on the announcement date of the special dividend. Suppose the marginal corporate tax rate is 20%, what is the agency cost arising from the excess cash before the repurchase? Provide an estimate of the lower bound of the agency cost.

Reference no: EM132776176

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