Question

Iota has $25 million in excess cash and no debt. The firm expects to generate additional free cash flows of $20 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicrons unlevered cost of capital is 15% and there are 20 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $25 million and use it to repurchase shares of the firm's stock.

A. Calculate Iota’s enterprise value.

B. What is Iota’s total market value, including cash?

C. Assume that Iota uses the excess cash to do a share repurchase. What is the share price They expect to pay?

D. How many shares will Iota repurchase at this amount?

E. How many shares will remain after the repurchase?

Answer 1

A. Calculate Iota’s enterprise value.
=25+20/15%=158.3333333 million

B. What is Iota’s total market value, including cash?
=158.3333333 million

C. Assume that Iota uses the excess cash to do a share repurchase. What is the share price They expect to pay?
=158.3333333/20=7.916666665

D. How many shares will Iota repurchase at this amount?
=25/7.916666665=3.157894738 million

E. How many shares will remain after the repurchase?
=20-3.157894738=16.84210526 million