Intermediate Financial Management Homework Assignment 4 If you follow along, you will know what the homework will cover. You can predict what to study if you pay attention. Remember to write your name/student ID on your paper. Please remind your homework assignments are due at the beginning of class on 6/30 . Question 1: A firm has $300 million of assets that includes $50 million of cash and 10 million shares outstanding. The firm uses $30 million of its cash to pay dividends. If an investor has 1000 shares, how many shares must he sell to create a homemade dividend of $3900. = Dividend payment number of shares times dividend per share = - Shares sold (amount needed dividend payment) / (new price per share) = = Old share price 300 / 10 $30; = = dividend payment 30 / 10 $3 = - = new share price $30 $3 $27 = - = shares sold (3900 3000) / 27 33.33 shares Question 2: Use the information for the question(s) below. Omicron Technologies has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 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 10% and there are 10 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock. 2.1 Omicron's enterprise value is closest to: = = = Enterprise value PV(Future FCF) $400 million 2.2 Including its cash, Omicron's total market value is closest to: - = = Enterprise value PV(Future FCF) $400 million = + = + = Market value Enterprise value cash $400 $50 $450 million 2.3 Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend. The amount of the special dividend is closest to:
Intermediate Financial Management Homework Assignment 4 If you follow along, you will know what the homework will cover. You can predict what to study if you pay attention. Remember to write your name/student ID on your paper. Please remind your homework assignments are due at the beginning of class on 6/30 . Question 1: A firm has $300 million of assets that includes $50 million of cash and 10 million shares outstanding. The firm uses $30 million of its cash to pay dividends. If an investor has 1000 shares, how many shares must he sell to create a homemade dividend of $3900. Dividend payment = number of shares times dividend per share Shares sold = (amount needed - dividend payment) / (new price per share) Old share price = 300 / 10 = $30; dividend payment = 30 / 10 = $3 new share price = $30 - $3 = $27 shares sold = (3900 - 3000) / 27 = 33.33 shares Question 2: Use the information for the question(s) below. Omicron Technologies has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 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 10% and there are 10 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock. 2.1 Omicron's enterprise value is closest to: Enterprise value = PV(Future FCF) = = $400 million 2.2 Including its cash, Omicron's total market value is closest to: Enterprise value - PV(Future FCF) = = $400 million Market value = Enterprise value + cash = $400 + $50 = $450 million 2.3 Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend. The amount of the special dividend is closest to:
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