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Question - Company ABC has 10,000 shares outstanding and the stock price is $100. The company is expected to pay a dividend of $10 per share next year and thereafter the dividend is expected to grow indefinitely by 6% a year. The company now makes an announcement: It will repurchase shares next year instead of issuing cash dividends. But from year 2 on the payout policy stays the same with cash dividends.
a. What is the expected rate of return on the stock?
b. At what price will the company repurchase shares next year? How many shares will be repurchased?
c. After the payout, what is the percentage ownership of an investor who holds 2% of the shares before the payout and does not sell shares during the repurchase?
d. Will this investor prefer cash dividend or stock repurchase? Please show your calculation.
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