Question

Jessica is a financial analyst in RTE Telecom Inc. 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 $111 million in its most recent fiscal year. • The firm's cost of capital (WACC) is 12%. 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 firm has 27.75 million shares outstanding. • The company has $296 million in debt and $185 million in preferred stock Along with the rest of the finance team, Jessica 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. Jessica 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 Jessica's calculations and observations, solve for the values in the following tables. Select the best answer provided in the selection list. Value Value I Value of the firm's operations | Intrinsic value of equity immediately D prior to stock repurchase Intrinsic stock price immediately prior to the stock repurchase 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.

Answer 1

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1 Le * 9 w ? v . 1 07:16 ENG 27-01-20207 . HE641 HC x HD fix HE HE HG H H HI HJ HK HL HM HN H O A 1 value of operations = FCF(1+g)/(WACC-g) Value of operations = 111(1+0.06)/(0.12-0.06) Value of operations = 1961.00 MILLION 2 Immediately prior to repurchase, intrinsic value of equity total value of the firm = value of operations + value of short term investment total value of the firm = 1980 + 75 = 2051.00 intrinsic value of equity = total value of firm - debt - preferred stock intrinsic value of equity = 2051 - 296 -185 = 1570.00 629 632 633 3 intrinsic stock price prior to repurchase intrinsic value of equity/ no of common shares outstanding 1570/ 27.75 = 56.57658 rounding to two digits = 56.58 636 637 638 4 no of shares repurchased 90 million/ 56.57658 = rounding to two digits = 639 1.59076 million 1.59 million 640 641 642 643 644 no of shares are repurchase 27.75 million -1.59076 million = rounding to two digits = 26.15924 million 26.16 million NPVOCF CASH FLOW STATW FCF ARM, MSI.confidenceINDEX CURRENCY LOAN CROSS OVER GM HPR AM TAX HEDGING MONEY MARKET GRO...

? v . 1 07:17 ENG 27-01-20707 HE667 . X HD fix HE HC HE HG H H HI HJ HK HL HM HN H O A 644 5 After repurchase, intrinsic value As short term investments are sold off Intrinsic value of equity = 1480.00 (1570-90] 650 6 after repurchase, intrinsic stock price 1480/26.15924 = rounding to two digits = 56.57658 56.58 654 655 1.59 1480 656 657 ANSWERS value of firm's operations intrinsic value of equity prior to repurchase intrinsic stock price prior to repurchase 1961 no of shares repurchased 1570 intrinsic value of equity after to repurchase 56.58 intrinsic stock price after to repurchase 56.58 658 659 660 The above statement is True because if a firm pays dividend of $0.59 per share, the price per share of the firm's stock will also fall by $0.59 to avoid any arbitrage oppurtunities. 662 663 664 665 666 667 NPVOCF CASH FLOW STATW FCF ARM, MSI.confidenceINDEX CURRENCY LOAN CROSS OVER GM HPR AM TAX HEDGING MONEY MARKET GRO...