Reference no: EM133059945

Question - On the ex-dividend date, stock price of the company will fall by the exact of dividends per share, assuming efficient markets.

Here are key financial data for House of Herring Inc.:

Earnings per share for 2025 $5.50

Number of shares outstanding 40 million

Target payout ratio 50%

Planned dividend per share $2.75

Stock price, year-end 2025 $130

House of Herring plans to pay the entire dividend early in January 2026. All corporate and personal taxes were repealed in 2024.

a) Other things equal, what will be House of Herring's stock price after the planned dividend payout?

b) Suppose the company cancels the dividend and announces that it will use the money saved to repurchase shares. What happens to the stock price on the announcement date? Assume that investors learn nothing about the company's prospects from the announcement. How many shares will the company need to repurchase?

c) Suppose that, instead of cancelling the dividend, the company increases dividends to $5.50 per share and then issues new shares to recoup the extra cash paid out as dividends. What happens to the with- and ex-dividend share prices? How many shares will need to be issued? Again, assume investors learn nothing from the announcement about House of Herring's prospects.