Consider an all$-$equity firm with the following charateristics that will liquidate in $2$ years.

The firm is expected to generate the following annual cash flows $($in $ mill.$).$ These cash flows will be paid out to shareholders as either

dividends or in a share buyback. The time $2$ cash flow includes all the cash flow from liquidation.

Assume all cash flows are paid out as dividends.

i What are the dividends per share $($DPS$)$ in each year?

ii What is the price $($value$)$ per share at time $0$ of these dividends?

$P(0)$

$2$ points

Now assume that the cash flow at time $1$ will be used to buy back shares instead of paying a dividend.

i At what price should the firm expect to buy back shares at time $1?$

$P(1)$

$2$ points

ii How many shares $($in mill.$)$ can the firm buy back at this price?

n$($buy$)$

million

$1$ point

How many shares $($in millions$)$ will remain outstanding after this buyback?

n $($out$)$

million

$1$ point

iv If the cash flow at time $2$ is paid out as dividends, what will the expected dividend per share be at time $2?$

$DPS(2)$

$1$ point

What is the price $($value$)$ per share at time $0$ of a share that just receives this dividend?

$P(0)$

$2$ points