JUNE EXAM

1. United Technologies 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. Uniteds unlevered cost of capital is 10% and there are 10 million shares outstanding. United's board is meeting to decide whether to pay out its 50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
   1. What are Uniteds enterprise and total market values?
   2. Assume that United uses the entire 50 million in excess cash to pay a special dividend. What will be the amount of the regular yearly dividends in the future?