Clovix Corporation has $50 million in cash, 10 million shares outstanding, and a current share price of $30. Clovix is deciding whether to use the $50 million to pay an immediate special dividend of $5.00 per share, or to retain and invest it at the risk-free rate of 10% and use the $5.00 million in interest earned to increase its regular annual dividend of $0.50 per share. Assume perfect capital markets. a. Suppose Clovix pays the special dividend. How can a shareholder who would prefer an increase in the regular dividend create it on her own? b. Suppose Clovix increases its regular dividend. How can a shareholder who would prefer the special dividend create it on her own?

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Business

Natalya Strong

1 February, 20:52

Clovix Corporation has $50 million in cash, 10 million shares outstanding, and a current share price of $30. Clovix is deciding whether to use the $50 million to pay an immediate special dividend of $5.00 per share, or to retain and invest it at the risk-free rate of 10% and use the $5.00 million in interest earned to increase its regular annual dividend of $0.50 per share. Assume perfect capital markets. a. Suppose Clovix pays the special dividend. How can a shareholder who would prefer an increase in the regular dividend create it on her own? b. Suppose Clovix increases its regular dividend. How can a shareholder who would prefer the special dividend create it on her own?

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Adyson Trujillo · Answer 1

a. Assuming an investor prefers the extra $0.50 per year, then he/she can invest the $5 received as special dividend and earn $0.50 himself/herself in the same or similar risk free investment.

b. If the investor needed or wanted the $5 instead of $0.50 extra per year, he/she can borrow the $5 and use the extra $0.50 per year to pay the interests on the loan.