Question

Question 4 (15 points). Consider Genron Corporation. The firm's board is meeting to decide how to pay out $20 million in excess cash to shareholders. Genron has no debt, and its equity cost of capital equals its unlevered cost of capital of 12%. Genron has 10 million shares outstanding, and expects to generate future free cash flows of $48 million per year starting from next year. Assume the capital market is perfect a)Suppose Genron uses all the cash to pay the dividend this year, calculate the cum-dividend price and ex-dividend price of Genron b)Suppose that instead of paying a dividend this year, Genron uses the $20 million to repurchase its shares on the open market. How would the share price of Genron change? Why? c)Suppose to pay the same amount of dividend in every year, Genron raises 28 million cash by selling new shares. Calculate the cum-dividend price and ex-dividend price of Genron.

Answer 1

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