Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

(a) Kim Corp. has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per

(a) Kim Corp. 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. Kim Corp.s cost of capital is 10% and there are 10 million shares outstanding. Kim Corp.'s board decided to use the entire $50 million to repurchase shares. Assume that you own 2,500 shares of Kim Corp. stock and that Kim Corp. uses the entire $50 million to repurchase shares. Assume Kim Corp. goes ahead with the share repurchase. What is the dollar value of regular annual dividends in the future?

(bUse the numbers from part (a). Suppose you are unhappy with the companys decision to repurchase and would prefer that Kim Corp. used the excess cash to pay a special dividend. Assume perfect capital markets. What trade you could place in order to receive the same amount of cash equivalent to Kim Corp. paying the special dividend?

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

Step: 3

blur-text-image

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

Not For Profit Audit Committee Best Practices

Authors: Warren Ruppel

1st Edition

0471697419, 978-0471697411

More Books

Students also viewed these Accounting questions

Question

10-9 How have social technologies changed e-commerce?

Answered: 1 week ago