Question

11. Dividends, repurchases, and firm value Remember that the primary goal of a firm is to maximize shareholder wealth by increasing the firm's intrinsic value. It is thus important to understand the impact of distributions- both in the form of dividends or stock repurchases-on the firm's value. Consider the following situation Rihana is a financial analyst in BTR Warehousing. As part of her analysis of the annual distribution policy and its impact on the firm's value, she makes the following calculations and observations: . The company generated a free cash flow (FCF) of $141 million in its most recent fiscal year * The firm's cost of capital (WACC) is 13%. The firm has been growing at 7% for the past six years but is expected to grow at a constant rate of 6% in the future. . The fim has 35.25 million shares outstanding . The company has $376 million in debt and $235 million in preferred stock. Along with the rest of the finance team, Rihana has been part of board meetings and knows that the company is planning to distribute $90 million, which is invested in short-term investments, to its shareholders by buying back stock from its shareholders. Rihana also observed that, at this point, apart from the $90 million in short-term investments, the firm has no other nonoperating assets. Using results from Rihana's calculations and observations, solve for the values in the following tables. Select the best answer provided in the selection list. Value Value Value of the firm's oper Intrinsic value of equity immediately prior to stock repurchase Intrinsic stock price immediately prior to the stock repurchase ations Number of shares repurchased Intrinsic value of equity immediately after the stock repurchase Intrinsic stock price immediately after the stock repurchase Based on your understanding of stock repurchases, identify whether the following statement is true or false: If a firm pays a dividend of $0.59 per share, the firm's stock price will also fall by $0.59 per share. This statement is because if a firm pays a dividend of $0.59 per share, the price per share of the firm's stock will also fall by $0.59 to any arbitrage opportunities. Session

Answer 1

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