15-3: Light Feet Corporation’s value of operations is estimated to be about $800 million. The compay...

15-3: Light Feet Corporation’s value of operations is estimated to be about $800 million. The compay has $160 million in debt. It has no preferred stock, but has 25 million shares of stock outstanding. It Feet has decided to distribute $60 million, which it presently is holding in short-term investments. Assume that the company has not yet made the distribution. What is the intrinsic value of equity? What is its intrinsic per share stock price? Now suppose that the company has just made the $60 million distribution in the form of dividends. What is Light Feet’s intrinsic per share stock price after this dividend payment? Suppose instead that the company just made the $60 million distribution in the form of a stock repurchase. What is its intrinsic per share stock price after the repurchase?

Expert Solution

Here given,

Value of operations (Assets) = $800 million
Short term investments (Assets) = $60 million
Total Assets = $800 million + $60 million = $860 million

Debt (Liabilities) = $160 million

No. of shares outstanding = 25 million

Intrinsic Value of equity = Assets - Liabilities
= $860 million - $160 million
= $700 million

Intrinsic per share stock price = Intrinsic value of equity/ No. of outstanding shares
= $700 million / 25 million
= $28

Now, after distribution of dividends, Value of assets becomes $800 million as there are no more investments and amount realised from investments is used to distribute dividends of $60 million
Now, intrinsic per share stock price = ($800 million - $160 million)/ 25 million
= $640 million/ 25 million
= $25.6

Now, number of shares repurchased = $60 million/ $10 (assumed stock re-purchased at $10/ share)
= 6 million
Now, number of outstanding shares after stock re-purchase = 25-6 = 19 million
Intrinsic value per share after stock re-purchase = $640 million/ 19 million
= $33.68

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