Question

Omicron Technologies has $ 40 million in excess cash and no debt. The firm expects to generate additional free cash flows of $ 32 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 11​% and there are 8 million shares outstanding. ​ Omicron's board is meeting to decide whether to pay out its $ 40 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 $ 40 million to repurchase shares. The number of shares that Omicron will have outstanding following the repurchase is closest​ to:

Answer 1

$4.55 million

Step-by-step explanation:

The calculation of number of shares repurchased is shown below:-

Market value = Enterprise value + Cash

= $32 million ÷ 0.11 + $40 million

= $330.909 million

Share price = Market value ÷ Outstanding shares

= $330.909 million ÷ $8 million

= $41.36 million

Number of shares repurchases = $40 million ÷ $41.36 million × 1,000,000

= 967,118 shares

Outstanding shares = 8 million - $967,118 shares

= $7,032,882

Dividend = Enterprise value ÷ Outstanding shares

= $32 million ÷ $7,032,882

= $4.55 million