Question

As a stockholder in Randolph Corporation, you receive its annual report.
In the financial statements, Randolph has reported that the after-tax (net)
income is $300 million. With 150 million shares of common stock
outstanding, Randolph announced to distribute $100 million of dividends
to its shareholders. The stock is now sold for $20 per share.

i. Calculate the value of investor’s wealth who holds 4,000 shares of Randolph
Corporation before the ex-dividend date,
ii. Calculate the dividend income of an investor who holds 4,000 shares of
Randolph Corporation until the ex-dividend date,
iii. Calculate the value of shareholding on the ex-dividend date of an investor who
holds 4,000 shares of Randolph Corporation.

Answer 1

Finance

We need to Calculate the value of investor’s wealth, dividend income of an investor and value of shareholding on the ex-dividend date.

Solution:

(i).

Given,

Number of shares = 4000

Sale price of a share =$20

Investor’s wealth who holds 4,000 shares of Randolph Corporation before the ex-dividend date

$$= Number \space of \space shares \times sale \space price$$

$$=4000 \times 20 = \$80000$$

(ii).

Dividend income of an investor who holds 4,000 shares of Randolph Corporation until the ex-dividend date

$$= Dividend \space per \space share \times number \space of \space shares \space hold$$

$$= \frac {100} {150} \times 4000 = \$2666.67$$

(iii).

The value of shareholding on the ex-dividend date of an investor who holds 4,000 shares of Randolph Corporation.

$$= Number \space of \space shares \times \frac {market value }{ Number \space of shares \space of common \space stock}$$

$$= 4000 \times \frac {3000 million - 100 million} {150 million}$$

$= 4000 \times 19.33 = \$ 77333.33$

( Market value of Randolph Corporation before Ex-Dividend Date = $ 20 per share * 150 million shares = $ 3000 million)

Answer: Yes.

Dividend income of an investor who holds 4,000 shares of  Randolph Corporation until the ex-dividend date =$80000

Dividend income of an investor who holds 4,000 shares of Randolph Corporation until the ex-dividend date =$2666.67

The value of shareholding on the ex-dividend date of an investor who holds 4,000 shares of Randolph Corporation= $77333.33