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What is the ex-dividend price per share

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Reference no: EM132803371

Question 1

Your all-equity firm is expected to generate a free cash flow of $50M per year in perpetuity starting next year, and also has a single free cash flow of $30M today. Assume that all free cash flows go to stockholders. An analysis of comparable firms informs you that the beta of your firm equals 1.4. Assume a risk-free rate of 3 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 $30M today. What is the cum-dividend and ex-dividend price per share?

b) Suppose instead that the firm will repurchase $30M 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 special dividend of $70M today. To pay this dividend, the firm will use the $30M in cash it has on hand and issue $40M worth of shares at the cumdividend 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 $70M special 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?

Reference no: EM132803371

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