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AMC Corporation currently has an enterprise value​ (EV) of $320 million and $110 million in excess cash. The firm has 25 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share​ repurchase, news will come out that will change​ AMC's enterprise value to either $520 million or $120 million. Suppose AMC waits until after the news comes out to do the share repurchase. What is​ AMC's share price after the repurchase if its enterprise value goes​ up? What is​ AMC's share price after the repurchase if its enterprise value​ declines?

The share price after the repurchase if its enterprise value goes up is $_____.

​(Round to two decimal​ places.)

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Nelly Stracke
Nelly StrackeLv2
28 Sep 2019
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Omicron Technologies 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. Omicrons unlevered cost of capital is 10% and there are 10 million shares outstanding. Omicron’s board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm’s stock.

(a) Omicron’s total market value is closest to:

(1) $500 million (2) $900 million (3) $400 million (4) $450 million


(b) Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend. The amount of the special dividend is closest to:

(1) $5.00 (2) $9.00 (3) $4.00 (4) $4.50

(c) Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend. The amount of the regular yearly dividends in the future is closest to:

(1) $4.50 (2) $5.00 (3) $4.00 (4) $9.00


(d) Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend. Omicron’s cum-dividend price is closest to:

(1) $50.00 (2) $40.00 (3) $5.00 (4) $45.00


(e) Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend. Omicron’s ex-dividend price is closest to:

(1) $40.00 (2) $5.00 (3) $50.00 (4) $45.00


(f) Assume that Omicron uses the entire $50 million in excess cash to repurchase shares. The number of shares that they repurchase is closest to:

(1) 1.0 million (2) 1.2 million (3) 1.1 million (4) 0.9 million


(g) Assume that Omicron’s uses the entire $50 million in excess cash to repurchase shares. The amount of the regular yearly dividends in the future is closest to:

(1) $9.00 (2) $5.00 (3) $4.50 (4) $4.00

(h) Assume that you own 2,500 shares of Omicron stock and that Omicron uses the entire $50 million to repurchase shares. Suppose that you are unhappy with Omicron’s decision and would prefer that Omicron used the excess cash to pay a special dividend. The number of shares that you would have to sell in order to receive the same amount of cash as if Omicron paid the special dividend is closest to:

(1) 275 (2) 310 (3) 125 (4) 250



(i) Assume that you own 2,500 shares of Omicron stock and that Omicron uses the entire $50 million to pay a special dividend. Suppose that you are unhappy with Omicron’s decision and would prefer that Omicron used the excess cash to repurchase shares. The number of shares that you would have to buy in order to undo the special cash dividend that Omicron paid is closest to:

(1) 125 (2) 275 (3) 250 (4) 310

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.

Harris Corp has 4 million outstanding common shares, and paid $2.15 per share in dividends last year. The current share price is $28. For the past 6 years the company has maintained a policy of paying out 65% of earnings as cash dividends. Exhibit below contains the projected balance sheet for Harris Corp for the upcoming year end, assuming no dividends. Earnings after tax are projected at $14,153,846.15.

a). If Harris Corp maintains its steady 65% cash dividend payout policy, what will be the total cash dividend payout and the total debt-to-equity ratio following the payout. What dividend payment will a holder of 300 common shares receive? Show your calculations.

b). Suppose that Harris Corp retains all its cash in order to finance the purchase of a large piece of land that will be used for future development of a new production centre. Instead of a cash dividend, a 30% stock dividend will be paid. Assess the impact of a stock dividend as follows:

i). What will the holder of 300 common shares receive?

ii). How will the balance sheet change, given the stock dividend, and what will the total debt-to-equity ratio be if earnings are projected to be unchanged after the land purchase?

iii). What can this same shareholder expect to receive in cash dividends next year if Harris returns to its steady 65% cash dividend payout policy?

c). Suppose that Harris has no investment plans and would like to payout 65% of its earnings to shareholders in the form of a share repurchase this year, and then will return to its policy of paying cash dividends in its future years. Earnings are projected to be unchanged. Assess the impact of a share repurchase as follows:

i). Calculate the number of shares Harris can repurchase if the share price remains at $28.

ii). Calculate the number of shares that will remain outstanding.

iii). In the next year, when the cash dividends are resumed, Calculate the per-share dividend and amount of dividends to be received by the former owner of 300 shares.

d). Referring to your analysis in part a) to c) briefly explain which of the three policies would be most attractive to shareholders.

Projected Balance Sheet Harris Corp.

Assets

Current Assets

Cash

18,000,000

Accounts Receivable

2,400,000

Inventory

9,230,000

29,630,000

PPE

6,240,000

Land

6,000,000

41,870,000

Liabilities and Shareholders’ Equity

Current Liabilities

Accounts Payable

1,870,000

Notes Payable

2,000,000

3,870,000

Long Term Debt

9,000,000

Common Shares

4,000,000

Retained Earnings

25,000,000

$41,870,000

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