6. Dividends, repurchases, and firm value Aa Aa Remember that the primary goal of a firm is to maximize shareholder wealth by increasing the firm's intrinsic value. It is thus important to understand the impact of distributions-both in the form of dividends or stock repurchases-on the firm's value. Consider the following situation: Erin is a financial analyst in Smith and T Co. 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 $150 million in its most recent fiscal year. The firm's cost of capital (WACC) is 13%. The firm has been growing at 6% for the past six years but is expected to grow at a constant rate of 5% in the future. The firm has 37.50 million shares outstanding. The company has $400 million in debt and $250 million in preferred stock. Along with the rest of the finance team, Erin has been part of board meetings and knows that the company is planning to distribute $75 million, which is invested in short-term investments, to its shareholders by buying back stock from its shareholders. Erin also observed that, at this point, apart from the $75 million in short-term investments, the firm has no other nonoperating assets. Using results from Erin's calculations and observations, solve for the values in the following tables. Select the best answer provided in the selection list. Value Value Value of the firm's operations Intrinsic value of equity Immediately 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 point, apart from the $75 million in short-term investments, the firm has no other nonoperating assets. Using results from Erin's calculations and observations, solve for the values in the following tables. Select the best answer provided in the selection list. Value Value $1,875.00 million Value of the firm's operations Intrinsic value of equity immediately 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 17 Based on your understanding of stock repurchases, identify whether the following statement is true or false: The value of operations depends on whether a firm decides to make distributions in the form of dividends or stock repurchases This statement is False because ignoring possible tax effects and signals, the value of a firm's operations firm distributes its residual earnings. does not does not depend on how the does
