Company Oakland has 100 shares of common stock outstanding. Its current stock price is $10 per share. Its current book value is $800 and total debt is $400. The company has $300 of excess cash. Assuming there are no personal income taxes or transaction costs, answer the following questions (i) – (iii).
(i) If the company distributes the excess cash to shareholders as cash dividends, what would be the (a) share price, (b) number of shares outstanding, (c) book value of equity, (d) market value of equity, and (e) debt to equity (market value) ratio before and after the dividend payment? (f) Does debt to equity ratio increase after the dividend payment?
(ii) If the company uses the excess cash to buy back its shares, what would be the (a) share price, (b) number of shares outstanding, (c) book value of equity, (d) market value of equity, and (e) debt to equity (market value) ratio before and after the share repurchase?
(iii) Which distribution policy above ((i) dividends or (ii) share repurchase) would result in greater wealth for shareholders? Provide your answer and briefly discuss the reasoning