Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

6. Dividends, repurchases, and firm value Remember that the primary goal of a firm is to maximize shareholder wealth by increasing the firm's intrinsic value.

image text in transcribedimage text in transcribed 6. Dividends, repurchases, and firm value 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 understan the impact of distributions-both in the form of dividends or stock repurchases-on the firm's value. Consider the following situation: Heather is a financial analyst in Bidget Corp. 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 $108 million in its most recent fiscal year. - The firm's cost of capital (WACC) is 13%. The firm has been growing at 5% for the past six years but is expected to grow at a constant rate of 4% in the future. - The firm has 27.00 million shares outstanding. - The company has $288 million in debt and $180 million in preferred stock. Along with the rest of the finance team, Heather has been part of board meetings and knows that the company is planning to distribute $60 million, which is invested in short-term investments, to its shareholders by buying back stock from its shareholders. Heather also observed that, at this point, apart from the $60 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 in the selection list. 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 because ignoring possible tax effects and signals, the value of a firm's operations depend on how the firm distributes its residual earnings

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals Of Corporate Finance

Authors: Richard A. Brealey, Marcus, Alan J, Myers, Stewart C.

2nd Edition

0070074860, 9780070074866

More Books

Students also viewed these Finance questions