Question

Omicron Technologies has $60 million in excess cash and no debt. The firm expects to generate additional free cash flows of $48 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 9% and there are 12 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $60 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 $60 million to repurchase shares. The amount of the regular yearly dividends in the future is closest to ________.

		C) $4.45
		A) $3.56
		B) $5.34
		D) $8.90

Answer 1

Assume that Omicron uses the entire $60 million to repurchase shares. The amount of the regular yearly dividends in the future is closest to:

Enterprise value =$48/0.09 = $533.33 million

Market value = Enterprise value + cash = $533.33 + $60 = $593.33 million

Share price = market value / shares outstanding = $593.33 million / 12 million = $49.44

Number of shares repurchased = $60 million / $49.44 = 1,213,483 shares

Shares outstanding = 12,00,000 - 1,213,483 = 10,786,517

Dividend = $48 miilion free cash flow / 10,786,517 = $4.45

So option (c) : $4.45