4,6

4. KMS corporation has assets of $500 million, $50 million of which are cash. It has debt of $200 million. If KMS repurchases $20 million of its stock: a. What changes will occur on its balance sheet? b. What will its new leverage ratio be? 5. Suppose that KMS in Problem 4 decides to initiate a dividend instead, but it wants the present value of the payout to be the same $20 million. If its cost of equity capital is 10%, to what amount per year in perpetuity should it commit (assuming perfect capital markets)? Dividends Versus Share Repurchases in a Perfect Capital Market 6. EJH Company has a market capitalization of $1 billion and 20 million shares out- standing. It plans to distribute $100 million through an open market repurchase. Assuming perfect capital markets: a. What will the price per share of EJH be right before the repurchase? b. How many shares will be repurchased? c. What will the price per share of EJH be right after the repurchase