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What will be the value of cash holdings after transaction

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Imagine that Telephonic Industries has excess cash of $300,000 and is considering an immediate payment of this amount as an extra dividend. The firm forecasts that, after the dividend, earnings will be $450,000 per year. There are 100,000 shares outstanding. The cost of capital of the firm is 16.67%. Imagine that the firm offers to repurchase its existing stock at $30.

Consider the portfolio of investor X who owns 1000 shares. He didn't need any cash, at that time so he didn't sell any of the stock during the buy back.

Suppose Investor X realizes that he actually needs cash $3000 in cash, but he missed up on the buy back. In general, he thinks it is unfortunate that the company decided to stock repurchase instead of distributing a dividend. If you were her financial advisor, could you recommend one specific transaction she could do to replicate the portfolio composition had a $3 dollar dividend been paid? Specifically: how many shares would she need to buy or sell? At what price? What will be the value of her cash holdings after the transaction? What would be the value of her stock holdings after the transaction?

Reference no: EM132842663

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