Example: Payout Policy in Perfect Market - Assume the Modigliani-Miller perfect capital markets conditions hold - Suppose XYZ Corp., a hypothetical firm, is considering how to pay or $50 million in excess cash to shareholders. XYZ has no debt and expects to generate free cash flow of $30 million per year in perpetuity, starting next year. After this year, all FCF gets paid out shareholders as dividends. XYZ's unnlevered cost of capital is 10%, sc its enterprise value is: EV=PV(FufureFCF)=0.10$30million=$300 million - With the cash, XYZ's market value is $350 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 $50 million to pay a cash dividend. 2) Repurchase $50 million of shares instead of paying a dividend. 3) Raise additional cash to pay a $100 million dividend. - What is the expected effect of each policy? What do shareholders prefer? Example: Payout Policy in Perfect Market - Assume the Modigliani-Miller perfect capital markets conditions hold - Suppose XYZ Corp., a hypothetical firm, is considering how to pay or $50 million in excess cash to shareholders. XYZ has no debt and expects to generate free cash flow of $30 million per year in perpetuity, starting next year. After this year, all FCF gets paid out shareholders as dividends. XYZ's unnlevered cost of capital is 10%, sc its enterprise value is: EV=PV(FufureFCF)=0.10$30million=$300 million - With the cash, XYZ's market value is $350 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 $50 million to pay a cash dividend. 2) Repurchase $50 million of shares instead of paying a dividend. 3) Raise additional cash to pay a $100 million dividend. - What is the expected effect of each policy? What do shareholders prefer