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Omicron Technologies will generate free cash flows of $45 million per year, in perpetuity, and will pay out these free cash flows as regular dividends. Omicron has no debt. Omicron’s unlevered cost of capital is 10% and there are 10 million shares outstanding. Omicron's board decides use this year’s $45 million in free cash flows to repurchase shares of the firm's stock. The number of shares that Omicron will have outstanding following the repurchase is closest to: A) 8.8 million B) 1.2 million C) 9.0 million D) 8.9 million

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Beverley Smith
Beverley SmithLv2
28 Sep 2019

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Iota Industries is an all-equity firm with 50 million shares outstanding. Iota has $200 million in cash and expects future free cash flows of $75 million per year. Management plans to use the cash to expand the firm’s operations, which will in turn increase free cash flows by 12%. Iota’s cost of capital is 10%. Assume that capital markets are perfect.

(a) The value of Iota if they use the $200 million to expand is closest to:

(1) $825 million (2) $688 million (3) $840 million (4) $950 million


(b) The value of Iota if they do not use the $200 million to expand and hold the cash instead is closest to:

(1) $840 million (2) $825 million (3) $950 million (4) $688 million


(c) The price per share of Iota if they use the $200 million to expand is closest to:

(1) $13.75 (2) $16.50 (3) $19.00 (4) $16.80


(d) The price per share of Iota if they do not use the $200 million to expand and hold the cash instead is closest to:

(1) $16.50 (2) $16.80 (3) $19.00 (4) $13.75


(e) The NPV of Iota’s expansion project is closest to:

(1) -$110 million (2) -$137.5 million (3) $0 (4) $75 million


(f) A member of Iota’s board of directors suggests that Iota’s stock price would be higher if they used the $200 million to repurchase shares instead of funding the expansion. If you were advising the board, what course of action would you recommend, expansion or repurchase? Which provides the higher stock price? Explain.

(g) Suppose that Iota is able to invest the $200 million in excess cash into a project that will increase future cash flows by 30%. If you were advising the board, what course of action would you recommend, investing the $200 million in an expansion project that will raise future free cash flows by 30% or use the $200 million to repurchase shares? Which provides the higher stock price? Explain.

1，

Consider two firms, With and Without, that have identical assets that generate identical cash flows. Without is an all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. With has 2 million shares outstanding and $12 million dollars in debt at an interest rate of 5%. There is no corporate tax.

Assume that MM's perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as with. You have $5000 of your own money to invest and you plan on buying Without stock. Using homemade leverage you borrow enough in your margin account so that the payoff of your margined purchase of Without stock will be the same as a $5000 investment in with stock. The number of shares of Without stock you purchased is closest to:

A425 B1650 C2000 D825

2，

Galt Industries has no debt, total equity capitalization of $600 million, and an equity beta of 1.2. Included in Galt's assets is $90 million in cash and risk-free securities. Assume the risk-free rate is 4% and the market risk premium is 6%. There is no tax.

Galt's asset beta (ie the beta of its operating assets) is closest to:

A1.1 B1.2 C1.3 D1.4

3，

Taggart Transcontinental has a value of $500 million if it continues to operate, but has outstanding debt of $600 million. If Taggart declares bankruptcy, bankruptcy costs will equal $50 million, and the remaining $450 million will go to creditors. Instead of declaring bankruptcy, Taggart proposes to exchange the firm's debt for a fraction of its equity in a workout. The minimum fraction of the firm's equity that Taggart would need to offer to its creditors for the workout to be successful is closest to:

A50% B75% C83% D90%

Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 1.2 million shares that are outstanding. Shareholders require a 8% rate of return from Consolidated stock. a. What is the price of Consolidated stock? Stock price $ b. What is the total market value of its equity? (Enter your answer in millions.) Market value of equity $ million Consolidated now decides to increase next year’s dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year. c. How much new equity capital will the company need to raise to finance the extra dividend payment? (Enter your answer in millions.) New equity $ million d. What will be the total present value of dividends paid each year on the new shares that the company will need to issue? (Enter your answer in millions.) Present value $ million e. What will be the transfer of value from the old shareholders to the new shareholders? (Enter your answer in millions.) Transfer of value $ million f. Is this figure more than, less than, or the same as the extra dividend that the old shareholders will receive? More than Less than The same

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