QUESTION 12 Edmond Ltd has $85 million in excess cash and no debt The firm expects to generate additional free cash flows of $48 million per year in subsequent years and will pay out these future free cash flows as regular dividends The firm's unlevered cost of capital is 12 and there are 18 million shares outstanding The firm's board is meeting to decide whether to pay out its $85 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock (7 marks) What is the enterprise value (i) without excess cash and (ii) with excess cash (1 marks) Assume that the firm uses the entire $85 million in excess cash to pay a special dividend What is the firms (i) cum dividend price and (ii) ex dividend price (1 marks) Assume that the firm uses the entire $85 million to repurchase shares How many outstanding shares will the firm have following the repurchase (1 marks) Assume that you own 3,500 shares and that the firm uses the entire $85 million to repurchase shares Suppose you are unhappy with the decision and would prefer that the firm used the excess cash to pay a special dividend How many shares you would have to sell in order to receive the same amount of cash as if the firm paid the special dividend (2 marks) Assume that you own 3,500 shares and that the firm uses the entire $85 million to pay a special dividend Suppose you are unhappy with the decision and would prefer the firm used the excess cash to repurchase shares How many shares you would have to buy in order to undo the special cash dividend that the firm paid (2 marks)

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QUESTION 12

Edmond Ltd has $85 million in excess cash and no debt. The firm expects to generate additional free cash flows of $48 million per year in subsequent years and will pay out these future free cash flows as regular dividends. The firm's unlevered cost of capital is 12% and there are 18 million shares outstanding. The firm's board is meeting to decide whether to pay out its $85 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock. (7 marks)

What is the enterprise value (i) without excess cash and (ii) with excess cash? (1 marks)

Assume that the firm uses the entire $85 million in excess cash to pay a special dividend. What is the firms (i) cum-dividend price and (ii) ex-dividend price? (1 marks)

Assume that the firm uses the entire $85 million to repurchase shares. How many outstanding shares will the firm have following the repurchase? (1 marks)

Assume that you own 3,500 shares and that the firm uses the entire $85 million to repurchase shares. Suppose you are unhappy with the decision and would prefer that the firm used the excess cash to pay a special dividend. How many shares you would have to sell in order to receive the same amount of cash as if the firm paid the special dividend? (2 marks)

Assume that you own 3,500 shares and that the firm uses the entire $85 million to pay a special dividend. Suppose you are unhappy with the decision and would prefer the firm used the excess cash to repurchase shares. How many shares you would have to buy in order to undo the special cash dividend that the firm paid? (2 marks)