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16 May, 16:39

The following data apply to Garber Industries, Inc. (GII) : Value of operations $1,000 Short-term investments $100 Debt $300 Number of shares 100 The company plans on distributing $100 as dividend payments. What will the intrinsic per share stock price be immediately after the distribution? a. $7.72 b. $6.32 c. $7.00 d. $7.35 e. $6.65

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  1. 16 May, 16:49
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    The correct option is $7, option C

    Explanation:

    The approach here is that we calculate the value of the firm after the cash dividend distribution, which is simply the value of operations of $1000 since the short-term investments of $100 has been used in paying dividends.

    Thereafter, the value of equity is the value of operations of $1000 minus the value of debt at $300, that is $700 ($1000-$300).

    Finally intrinsic share price=value of equity/number of shares

    number of shares is 100

    intrinsic value per share=$700/100=$7 per share
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