Repurchases and the DCF model Little Oil has 1 million shares outstanding with a total market value of $20 million. The firm is expected to pay $1 million of dividends next year, and thereafter the amount paid out is expected to grow by 5% a year in perpetuity. Thus, the expected dividend is $1.05 million in year 2, $1.1025 million in year 3, and so on. However, the company has heard that the value of a share depends on the flow of dividends, and therefore, it announces that next year’s dividend will be increased to $2 million and that the extra cash will be raised immediately afterward by an issue of shares. After that, the total amount paid out each year will be as previously forecasted—that is, $1.05 million in year 2 and increasing by 5% in each subsequent year.
- a. At what price will the new shares be issued in year 1?
- b. How many shares will the firm need to issue?
- c. What will be the expected dividend payments on these new shares, and what therefore will be paid out to the old shareholders after year 1?
- d. Show that the present value of the cash flows to current shareholders remains $20 million.
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PRIN.OF CORPORATE FINANCE
- SLMA Corp. for the last ten years, has earned and had cash flows of about P600,000 every year. As per the predictions of the company'searnings, the same cash flow would continue for the foreseeable future. The expenses for the business every year is about P500,000only. Based on the available public information a P4 million Treasury bond has a prevailing return of P40,000 quarterly. Using Capitalization of Earnings approach, assuming SLMA would sell 20% of its shareholdings, what will be the minimum selling price? a. 2,500,000 b. 500,000 c. 1,500,000 d. 1,000,000arrow_forwardSLMA Corp. for the last ten years, has earned and had cash flows of about P600,000 every year. As per the predictions of the company'searnings, the same cash flow would continue for the foreseeable future. The expenses for the business every year is about P500,000only. Based on the available public information a P4 million Treasury bond has a prevailing return of P40,000 quarterly. Using Capitalization of Earnings approach, assuming SLMA would sell 20% of its shareholdings, what will be the minimum selling price? ANSWER: 2,500,000 provide the solution pleasearrow_forwardDewey Corp. is expected to have an EBIT of $2,850,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $220,000, $125,000, and $225,000, respectively. All are expected to grow at 16 percent per year for four years. The company currently has $17,000,000 in debt and 835,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 2.8 percent indefinitely. The company’s WACC is 9.2 percent and the tax rate is 23 percent. What is the price per share of the company's stock?arrow_forward
- Bloom Company Limited expects its EBIT to be $100,000 every year forever. The firm can borrow at 9 percent. The firm currently has no debt, and its cost of equity is 18 percent. The tax rate is 35 percent. The firm will borrow $80,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization?arrow_forwardA business will have net inflows of € 20 million, € 12 million, € 11 million, € 8 million, and € 5 million. for the next five years. Its current book value is € 30 million. The company has issued 10,000 bonds with an annual interest rate of 3%, with a nominal value of € 1,000 each and maturing in five years. If the market rate is 4%, what is the value of the business, bond and share capital?arrow_forwardDerry Corporation is expected to have an EBIT of $2,600,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $195,000, $100,000, and $200,000, respectively. All are expected to grow at 17 percent per year for four years. The company currently has $14,500,000 in debt and 810,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 2.3 percent, indefinitely. The company’s WACC is 8.6 percent and the tax rate is 23 percent. What is the price per share of the company's stock? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.arrow_forward
- Rose Company Limited expects its EBIT to be $100,000 every year forever. The firm can borrow at 9 percent. The firm currently has no debt, and its cost of equity is 18 percent. The tax rate is 35 percent. The firm will borrow $80,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization?arrow_forwardCrazytown Motors is expected to have an EBIT of $680,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $45,000, $9,000, and $40,000, respectively. All cash flow items are expected to grow at 6 percent per year for two years. After Year 3, the CFA is expected to grow at 3 percent indefinitely. The company currently has $3 million in debt and 250,000 shares outstanding. The company's WACC is 9.5 percent and the tax rate is 20 percent. What is the present value of terminal value? Show your steps. What is the price per share of the company's stock? Show your steps.arrow_forwardButtercup Company Limited expects its EBIT to be $100,000 every year forever. The firm can borrow at 9 percent. The firm currently has no debt, and its cost of equity is 18 percent. The tax rate is 35 percent. The firm will borrow $80,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization?arrow_forward
- Crarytown Motors is expected to have an EBIT of $680,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $45,000, $9,000, and $40,000respectively. All cash flow items are expected to grow at 6 percent per year for two years. After Year 3, the CFA is expected to grow at 3 percent indefinitely. The company currently has $3.5 million in debt and 250,000 shares outstanding The company's WACC is 9.5 percent and the tax rate is 20 percent. What is the present value of terminal value? Show your steps.arrow_forwardA proposed recapitalization plan for Focus Corporation would change its current all-equity capital structure to leveraged capital structure. The proposal is for Focus to sell $47,000,000 worth of long-term debt at an interest rate of 6.5% and then repurchase as many shares as possible at a price of $28 per share. Focus currently has 4,800,000 shares outstanding and expects EBIT to be $27,000,000per year in perpetuity. Ignoring taxes, calculate the following: a. The number of shares outstanding, the per-share price, and the debt-to-equity ratio for Focus if it adopts the proposed recapitalization. b. The earnings per share (EPS) and the return on equity (ROE) for Focus under the current and proposed capital structures. c. The EBIT where EPS is the same for both capital structures. d. The EBIT where EPS is zero for both capital structures a) The number of shares outstanding for Focus if adopts the proposed recapitalization is _3,121,429_ shares. (round to the nearest…arrow_forwardMore on the corporate valuation model Globex Corp. is expected to generate a free cash flow (FCF) of $2,020.00 million this year (FCF₁ = $2,020.00 million), and the FCF is expected to grow at a rate of 20.20% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 2.46% per year, which will last forever (FCF₄). Assume the firm has no nonoperating assets. If Globex Corp.’s weighted average cost of capital (WACC) is 7.38%, what is the current total firm value of Globex Corp.? (Note: Round all intermediate calculations to two decimal places.) $6,344.09 million $67,122.55 million $66,519.07 million $55,432.56 million Globex Corp.’s debt has a market value of $41,574 million, and Globex Corp. has no preferred stock. If Globex Corp. has 300 million shares of common stock outstanding, what is Globex Corp.’s estimated intrinsic value per share of common stock? (Note: Round all…arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT