- Assume the Modigliani-Miller perfect capital markets conditions hold. - Suppose XYZ Corp., a hypothetical firm, is considering how to pay out $30 million in excess cash to shareholders. XYZ has no debt and expects to generate free cash flow of $22 million per year in perpetuity, starting next year. After this year, all FCF gets paid out to shareholders as dividends. XYZ's unlevered cost of capital is 11%, so its enterprise value is: EV=PV(FufureFCF)=0.11$22million=$200 million - With the cash, XYZ's market value is $230 million. It has 10 million shares outstanding. - Explain EV and MV? - XYZ's board is considering 3 options for distributing the excess cash: 1) Use the $30 million to pay a cash dividend. 2) Repurchase $30 million of shares instead of paying a dividend. 3) Raise additional cash to pay a $75 million dividend. - What is the expected effect of each policy? What do shareholders prefer? - Assume the Modigliani-Miller perfect capital markets conditions hold. - Suppose XYZ Corp., a hypothetical firm, is considering how to pay out $30 million in excess cash to shareholders. XYZ has no debt and expects to generate free cash flow of $22 million per year in perpetuity, starting next year. After this year, all FCF gets paid out to shareholders as dividends. XYZ's unlevered cost of capital is 11%, so its enterprise value is: EV=PV(FufureFCF)=0.11$22million=$200 million - With the cash, XYZ's market value is $230 million. It has 10 million shares outstanding. - Explain EV and MV? - XYZ's board is considering 3 options for distributing the excess cash: 1) Use the $30 million to pay a cash dividend. 2) Repurchase $30 million of shares instead of paying a dividend. 3) Raise additional cash to pay a $75 million dividend. - What is the expected effect of each policy? What do shareholders prefer