Reference no: EM132681999
Your all-equity firm is expected to generate a free cash flow of $20M per year in perpetuity starting next year, and also has a free cash flow of $20M today. Assume that all free cash flows go to stockholders. An analysis of comparable firms informs you that the beta of your firm equals 1.8. Assume a risk-free rate of 3.5 percent and a market risk premium of 5 percent. Also assume that your firm has 10M shares outstanding.
a) Suppose that the firm will pay out a total dividend of $20M today. What is the cum-dividend and ex-dividend price per share?
b) Suppose instead that the firm will repurchase $20M worth of shares today at the cum-dividend price. How many shares does the firm repurchase? Calculate the share price after the firm repurchases these shares.
c) Suppose instead that the firm will pay out a total dividend of $60M today. To pay this dividend, the firm will use the $20M in cash it has on hand and issue $40M worth of shares at the cum- dividend price. Answer the following questions:
(i) How many shares does the firm have to issue to receive $40M in cash?
(ii) What percentage of the firm is sold in exchange for this $40M in cash?
(iii) What is the price per share for this firm before the $60M dividend is paid out but after the $40M in cash is raised through the new equity issuance?
(iv) What is the ex-dividend price per share?
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