Seashore Salt Co. has surplus cash. Its CFO decides to pay back $4 per share to investors by…

Seashore Salt Co. has surplus cash. Its CFO decides to pay back $4 per share to investors by initiating a regular dividend of $1 per quarter or $4 per year. The stock price jumps to $90 when the payout is announced.

1 Why does the stock price increase?

2 What happens to the stock price when the stock goes ex dividend?

3 Assume instead that the CFO announces a stock repurchase of $4 per share instead of a cash dividend. What happens to the stock price when the purchase is announced? Would you expect the price to increase to $90? Explain briefly.

4 Suppose the stock is repurchased immediately after the announcement. Would the repurchase result in an additional stock-price increase?