Question
THE FOLLOWING INFORMATION RELATES TO QUESTIONS 6 AND 7 ONLY Consider a company that is 100% equity financed. It is expected to generate $200,000 of
THE FOLLOWING INFORMATION RELATES TO QUESTIONS 6 AND 7 ONLY Consider a company that is 100% equity financed. It is expected to generate $200,000 of free cash flows in perpetuity and has a cost of capital of 11%. A dissident shareholder has a 20% stake in the company and uses her influence to force the company to change its investment practices. The dissident shareholder expects these changes to result in a 2% reduction in cost of capital.
QUESTION 6 Assuming that the dissident shareholders expectations are realised, the increase in value of the dissident shareholders stake would be approximately:
| A. | $224,935 | |
| B. | $36,364 | |
| C. | $109,773 | |
| D. | $80,808 | |
| E. | None of the above |
QUESTION 7
REFER TO THE INFORMATION AT THE TOP OF QUESTION 6.
Suppose now the dissident shareholder expects these changes to result in a 1% reduction in cost of capital instead. Other information remains the same. What is the increase in the value of the dissident shareholders stake if her expectations are realised?
| A. | $224,935 | |
| B. | $36,364 | |
| C. | $109,773 | |
| D. | $80,808 | |
| E. | None of the above |
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