Elle 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 $45 million in its most recent fiscal year.
• The firm’s cost of capital (WACC) is 14%. The firm has been growing at 10% for the past six years but is expected to grow at a constant rate of 8% in the future.
• The firm has 11.25 million shares outstanding.
• The company has $120 million in debt and $75 million in preferred stock.
Along with the rest of the finance team, Elle has been part of board meetings and knows that the company is planning to distribute $120 million, which is invested in short-term investments, to its shareholders by buying back stock from its shareholders. Elle also observed that, at this point, apart from the $120 million in short-term investments, the firm has no other nonoperating assets.
Using results from Heather's calculations and observations, solve for the values in the following tables. Select the best answer provided.
Value of the firm's operations (65.14, 871.29, 6,514.29, 814.29) number of shares purchased (3.49, 2.05, 1.64, 2.67)
Intrinsic value of equity immediately prior to stock (729, 624, 824, 881) intrinsic value of equity immediately after the stock repurchase (709.29, 624.00, 6,409.00, 662.29)
Instrinsic stock price immediately prior to the stock repurchases (57.83, 61.83, 51.1, 43.79) intrinsic stock price immediately after the stock repurchase (61.83, 51.16, 57.83, 43.79)
The numbers in brackets above are the choices for answers.
When firms make distributions in the form of dividends, the stock price falls by the value of dividends per share (DPS) distributed, but the overall shareholder wealth does no decrease.
The above statement is (True or false) because if a firm pays dividend of $1 per share, the price per share of the firm's stock will also fall by $1 to (avoid or encourage) any arbitrage oppurtunities.