Natsam Corporation has $25 million of excess cash. The firm has no debt and 20 million sharesoutstanding. The operating assets are expected to generate free cash flows of 18 million per yearstarting from next year till infinity. Its asset cost of capital is 10%. Natsam's board has decided topay out all this cash as a one-time dividend three days later.(a) What is the current stock price (i.e., the cum-dividend price)?(b) What is the ex-dividend price in a perfect capital market?(c) If the board instead decided to use the cash to do a one-time share repurchase, in a perfectcapital market, what is the price of the shares once the repurchase is complete?(d) In a perfect capital market, which policy do investors in the firm prefer?

We have to find the share price under three different situations: as-is with excess cash; price…

Natsam Corporation has $25 million of excess cash. The firm has no debt and 20 million shares outstanding. The operating assets are expected to generate free cash flows of 18 million per year starting from next year till infinity. Its asset cost of capital is 10%. Natsam's board has decided to pay out all this cash as a one-time dividend three days later. 1 (a) What is the current stock price (i.e., the cum-dividend price)? (b) What is the ex-dividend price in a perfect capital market? (c) If the board instead decided to use the cash to do a one-time share repurchase, in a perfect capital market, what is the price of the shares once the repurchase is complete? (d) In a perfect capital market, which policy do investors in the firm prefer?

Natsam Corporation has $25 million of excess cash. The firm has no debt and 20 million shares outstanding. The operating assets are expected to generate free cash flows of 18 million per year starting from next year till infinity. Its asset cost of capital is 10%. Natsam's board has decided to pay out all this cash as a one-time dividend three days later. 1 (a) What is the current stock price (i.e., the cum-dividend price)? (b) What is the ex-dividend price in a perfect capital market? (c) If the board instead decided to use the cash to do a one-time share repurchase, in a perfect capital market, what is the price of the shares once the repurchase is complete? (d) In a perfect capital market, which policy do investors in the firm prefer?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 4P

See similar textbooks

Similar questions

Analysts expect ElectroSoft to generate $99.65141 million of free cash flow at the end of the current year. (Assume that cash flows occur on December 31 and today is January 1.) Analysts expect Electrosoft's cash flow to grow at 3% in perpetuity. Electrosoft has no debt and its shareholders require a return of 11%. There are 153.78293 million shares outstanding, and the shares trade for $8.10. ElectroSoft has announced a stock repurchase. It intends to buy 36.6 million shares at a price of $9 per share. The repurchase will be debt financed. After the repurchase, the company's debt-to-equity ratio will be 1/3 and it will maintain that ratio in perpetuity. The cost of debt is 5% and the tax rate is 35%. Answer the following questions. Part 1 What is the levered cost of equity after the repurchase? (Express your answer in percentage form rounded to one decimal place.) Cost of equity= Part 2 What is the company's WACC after the repurchase? (Express your answer in percentage form rounded to…
Rian Corporation is currently working without using debt. The estimated operating profit per year is $16.065,180.00 while the equity capitalization rate (ke) is 18% pa. In the coming year, Rian is considering replacing some of his shares with a debt of $50 million, with an interest rate of 15% per annum. Question: a. Calculate the value of own capital capitalization (CS), the total capitalization value of the company (V), and the overall capitalization rate (ko) using the Net Income Approach. b. Calculate the amount of equity capitalized value, total capitalization value of the company, and overall capitalization rate using the traditional approach, if additional debt causes the equity capitalization rate (ke) to increase to 20%. c. Draw a graph of the two approaches.
Analysts expect the Cornhusk Bank to generate $99.825 million of free cash flow at the end of the current year. (Assume that cash flows occur on December 31 and today is January 1.) Analysts expect Cornhusk's cash flow to grow at 3% in perpetuity. Cornhusk has no debt and its shareholders require a return of 11%. There are 199.96995 million shares outstanding which trade for $6.24. The CFO of Cornhusk wants to borrow and use the borrowed funds to repurchase shares. The company will borrow enough funds such that its debt-to-value ratio is 25% and it plans to maintain that ratio in perpetuity. (D/E = 1/3.) The cost of debt is 5% and the tax rate is 40%. What stock price should the company offer for %3D repurchased shares such that the post-repurchase stock price is equal to the repurchase price? $6.46 $6.56 $6.76 $6.66
Pharoah, Inc., paid a dividend of $4.25 last year. The company's management does not expect to increase its dividend in the foreseeable future. If the required rate of return is 17.0 percent, what is the current value of the stock? (Round answer to 2 decimal places, e.g. 15.25.) Current value
Alla Bazzter Excursions Co. holds a total in assets of $840,000 but $168,000 of that is excess cash. The firm has 80,000 total shares outstanding and expects $2 million in net income this year. The firm is considering its options with the excess cash, which includes stock buy-back. What will the net effect to the company's earnings-per-share (EPS) if it executes the stock buy back?
Use the information for the question(s) below. Assume that Rose Corporation's (RC) EBIT is not expected to grow in the future and that all earnings are paid out as dividends. RC is currently an all-equity firm. It expects to generate earnings before interest and taxes (EBIT) of $7 million over the next year. Currently RC has 6 million shares outstanding and its stock is trading for a price of $12 per share. RC is considering borrowing $12 million at a rate of 6% and using the proceeds to repurchase shares at the current price of $12.00. Following the borrowing of $12 million and subsequent share repurchase, the equity cost of capital for RC is closest to (%) (2 decimal places):
Assume that XYZ Corporation's (XYZC) EBIT is not expected to grow in the future and that all earnings are paid out as dividends. XYZC is currently an all equity firm. It expects to generate earnings before interest and taxes (EBIT) of $6 million over the next year. Currently XYZC has 5 million shares outstanding and its stock is trading for a price of $12.00 per share. XYZC is considering borrowing $12 million at a rate of 6% and using the proceeds to repurchase shares at the current price of $12.00. A) Prior to any borrowing and share repurchase, XYZC's EPS is closest to: B) Prior to any borrowing and share repurchase, the equity cost of capital for XYZC is closest to: C) What is the breakeven-level of EBIT for the two capital structures?
Omicron Technologies has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicron's unlevered cost of capital is 11% and there are 10 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock. Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend. Omicron's cum - dividend price is closest to: A. $ 50 B. $83 C. $ 41 D.$33
Nynet, Inc., paid a dividend of $3.92 last year. The company's management does not expect to increase its dividend in the foreseeable future. If the required rate of return is 14.5 percent, what is the current value of the stock? (Round answer to 2 decimal places, e.g. 15.25.) Current value $
Is my answer correct? I feel as if I am missing a few steps. AFW Industries has 201 million shares outstanding and expects earnings at the end of this year of $673 million. AFW plans to pay out 61% of its earnings in total, paying 34% as a dividend and using 27% to repurchase shares. If AFW's earnings are expected to grow by 8.9% per year and these payout rates remain constant, determine AFW's share price assuming an equity cost of capital of 12.1%. Formula is g = ROE x b Do the opposite of the formula G = 8.9%; payout is 61% (1 - .61 = .39) 9% - .39 = .89 -.39 = .5
You expect X-Co will pay a dividend of $76 million and repurchase $100 million of its common shares next year (Year 1) with both expected to grow 8% in Year 2 and 6% in Year 3. If you expect the company to be sold for $12 billion at the end of Year 3, and you have calculated the cost of equity to be 8.4%, what do you estimate the true value of the company’s net worth to be now? (First draw a timeline. Assume all cash flows are at the end of the year.)
In mid-2018, some analysts recommended that General Electric (GE) suspend its dividend payments to preserve cash needed for investment. Suppose you expected GE to stop paying dividends for two years before resuming an annual dividend of $1.20 per share, paid 3 years from now, growing by 2.5% per year. If GE's equity cost of capital is 9.5%, estimate the value of GE's shares today. The price today is $ (Round to the nearest cent.)