Question

The following data apply to Grullon-Ikenberry Inc. (GII): Value of operations $1,000, Short-term investments $100, Debt $300, Number of shares 100; The company plans on distributing $50 million as dividend payments. What will the intrinsic per share stock price be immediately after the distribution?pital-budget-850-000-wants-maintain-target-capital-structure-35-debt-65--q3670174

Answer 1

1) $6.32

2) $7.50

3) $6.65

4) $7.35

The correct option is the second one ,$7.50

Step-by-step explanation:

The value of operations is $1,000

If dividends of $50 million is paid,such cash would be paid would be gotten from short-term investments of $100 million since it is easily convertible to cash without losing a significant portion of its value,hence the short term investments reduce to $50 million

$ million

Value of operations $1000

plus value of non-operating assets $50

Value of firm $1050

less value of debt ($300)

Intrinsic value of the firm $750

Intrinsic value of share=$750/100=$7.5

The intrinsic value per share is the total value attributable to common stock divided by the number of common stock in issue.