Corporation A has $50 million in excess cash and no debt. The firm expects to generate...

Corporation A has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Corporation A's cost of capital is 10% and there are 10 million shares outstanding. Corporation A's board decided to use the entire $50 million to repurchase shares. Assume that you own 2,500 shares of Corporation A stock and that Corporation A uses the entire $50 million to repurchase shares.

Assume Corporation A goes ahead with the share repurchase. What is the dollar value of regular annual dividends in the future?

Solutions

Expert Solution

Dollar Value of regular annual dividends = $40 Million and Dollar Value of regular annual dividends per share after repurchase = $4.5

You hold 2,500 shares. Shares repurchased is 1,111,111 out of 10 Million outstanding. Thus, 11.11% is repurchased. Hence assumed 11.11% of 2,500 shares is repurchased, number of shares held by you after repurchase = 2500-(2500*11.11%) = 2222 shares

Regular annual dividend = 2222 shares * 4.5 = $9,999.

Note:

1. Value of the firm equals the future cashflows divided by the cost of capital

jeff jeffy answered 1 year ago

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