8. Company A has 150m in cash and its other operating) assets have a 520m book value. It has 100 millionshares trading at 9 and nodebt. The cash is in bank accounts and government bonds yielding in total a very safe annual return of 2%, i.e., cash is forecast to generate earnings of 3m by yearend. The operating assets are forecast to generate earnings of 52m by yearend. An activist investor argues that all that cash is depressing the company's return onequity (ROE) and its earnings pershare (EPS), and advocates a large payout of some form. Under pressure, management is considering three options: the status quo, a large dividend or a large buyback. m. Under the status quo (i.e., without paying out the cash), what is the market value of the operating (i.e., non-cash)assets?Whatarethe forecast ROE and EPS forthe year? n. Saymanagementopted to use the cashtopay an exceptional 1.5dividend pershare. (To simplify, say this occurs immediately). What would be the new ROE and EPS forecasts? What would be the ex dividend stock price and the cum dividend stock price? 0. Say management opted to use the cash in a self-tender share repurchase. (To simplify, say this occurs immediately). The company would offer to buy upto 10 millionshares at 15 for a total of 150m (or less). If shareholders tendered (1.e., offered the company) fewer than 10 million in total, the company would buy them all. If they tendered more than 10 millionshares, they wouldberationedona proratabasis. For instance, if shareholders tendered 20 million shares in total, each shareholder who tendered someshares would in fact sellonly half of those shares. Would more/fewer than 10 million shares be tendered? How many shares would be repurchased? What would be the stock price post-buyback? What would be the new forecast ROE and EPS? What would be the pre-repurchase stock price after the announcement of the repurchase? p. Which of the three options, if any, achieve the activist's goal of increasing ROE? Explain. Which option, if any, achieve the activist's goal of increasing EPS? Explain. Which option makes shareholders better off? 8. Company A has 150m in cash and its other operating) assets have a 520m book value. It has 100 millionshares trading at 9 and nodebt. The cash is in bank accounts and government bonds yielding in total a very safe annual return of 2%, i.e., cash is forecast to generate earnings of 3m by yearend. The operating assets are forecast to generate earnings of 52m by yearend. An activist investor argues that all that cash is depressing the company's return onequity (ROE) and its earnings pershare (EPS), and advocates a large payout of some form. Under pressure, management is considering three options: the status quo, a large dividend or a large buyback. m. Under the status quo (i.e., without paying out the cash), what is the market value of the operating (i.e., non-cash)assets?Whatarethe forecast ROE and EPS forthe year? n. Saymanagementopted to use the cashtopay an exceptional 1.5dividend pershare. (To simplify, say this occurs immediately). What would be the new ROE and EPS forecasts? What would be the ex dividend stock price and the cum dividend stock price? 0. Say management opted to use the cash in a self-tender share repurchase. (To simplify, say this occurs immediately). The company would offer to buy upto 10 millionshares at 15 for a total of 150m (or less). If shareholders tendered (1.e., offered the company) fewer than 10 million in total, the company would buy them all. If they tendered more than 10 millionshares, they wouldberationedona proratabasis. For instance, if shareholders tendered 20 million shares in total, each shareholder who tendered someshares would in fact sellonly half of those shares. Would more/fewer than 10 million shares be tendered? How many shares would be repurchased? What would be the stock price post-buyback? What would be the new forecast ROE and EPS? What would be the pre-repurchase stock price after the announcement of the repurchase? p. Which of the three options, if any, achieve the activist's goal of increasing ROE? Explain. Which option, if any, achieve the activist's goal of increasing EPS? Explain. Which option makes shareholders better off
