Question

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. Omicron's unlevered cost of capital is 8% 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. Assume that Omicron uses the entire $50 million to repurchase shares. The number of shares that Omicron will repurchase is closest to:_____

Answer 1

Omicron Technologies

The number of shares that Omicron will repurchase is closest to:_____

1,000,000 shares.

Step-by-step explanation:

Excess cash = $50 million

Free cash flows in subsequent years = $40 million per year

Dividends payment in most recent year = $40 million

Unlevered cost of capital = 8%

Outstanding common stock = 10 million shares

Dividend per share = $4 ($40,000,000/10,000,000)

Share price = dividend per share/unlevered cost of capital

= $50 ($4/0.08)

Number of shares to repurchase = $50,000,000/$50

= 1,000,000 shares