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Problem: Cabot Vineyards has been paying a regular cash dividend of $4.80 per share each year for over a decade. The company is paying out all its earnings as dividends and is not expected to grow. There are 118,000 shares outstanding selling for $80 per share. The company has enough cash on hand to pay the next annual dividend. Suppose that Cabot announces today that starting a year from now, it will cut its cash dividend to zero and will use the cash to repurchase shares instead.
Required:
1. What is the immediate stock price reaction? Ignore taxes and assume that the repurchase program conveys no information about operating profitability or business risk.
2. How many shares will Cabot re-purchase?
3. Project and compare future stock prices for the old and new policies for the next 3 years. What is the annual return to shareholders under each of the policies?
Both Bond Bill and Bond Ted have 10.4 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 5 years to maturity, whereas Bond Ted has 22 years to maturity.
Case Study: Hotmail Corporation., Holloway, Chuck; Mukherjee, Pratap. Case No. E64.
An auto dealership is advertising that a new car with a sticker price of $35,208 is on sale for $25,995 if payment is made in full, or it can be financed.
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