Question
Danielle is a financial analyst in Blanche Inc. As part of her analysis of the annual distribution policy and its impact on the firms value,
Danielle is a financial analyst in Blanche Inc. As part of her analysis of the annual distribution policy and its impact on the firms value, she makes the following calculations and observations:
The company generated a free cash flow (FCF) of $135 million in its most recent fiscal year. | |
The firms cost of capital (WACC) is 14%. 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 33.75 million shares outstanding. | |
The company has $360 million in debt and $225 million in preferred stock. |
Along with the rest of the finance team, Danielle 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. Danielle 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 Danielles calculations and observations, solve for the values in the following tables:
Value of the firms operations |
Intrinsic value of equity immediately prior to stock repurchase |
Intrinsic stock price immediately prior to the stock repurchase |
Number of shares repurchased |
Intrinsic value of equity immediately after the stock repurchase |
Intrinsic stock price immediately after the stock repurchase |
Based on your understanding of stock repurchases, identify whether the following statement is true or false:
"The stock price of a firm increases after the firm repurchases some of its shares."
This statement is (T/F) because if the stock price changes after a firm conducts its share repurchase, then there (Will be/Will not be) arbitrage opportunities. Thus, the price of the stock remains the same after a repurchase.
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