Question

2-Partition Corp. is an all-equity firm with 5000000 shares outstanding. Partition Corp has $25000000 in cash and expects future free cash flows of $65000000 per year. The cost of capital of Partition Corp. s investments is 12%. What would be the price of the stock (ex-dividend) if Partition Corp. where to issue dividends with the excess cash?

Answer 1

Number of share outstanding = 5,000,000

Available Cash = $25,000,000

Expected dividend per share = $25,000,000 / 5,000,000

= $5.00

Expected dividend per share is $5.00.

Expected future FCF = $65,000,000

Cost of capital = 12%.

Value of firm = $65,000,000 / 12%

= $541,666,667.67.

Value of firm before dividend payment = $541,666,667.67 / 5,000,000

= $108.33.

Stock price before dividend payment is $108.33.

Stock price after dividend [ayment (ex dividend) = $108.33 - $5.00

= $103.33.

Ex dividend stock price is $103.33.