Natsam Corporation has $25 million of excess cash. The firm has no debt and 20 million sharesoutstanding. The operating assets are expected to generate free cash flows of 18 million per yearstarting from next year till infinity. Its asset cost of capital is 10%. Natsam's board has decided topay out all this cash as a one-time dividend three days later.(a) What is the current stock price (i.e., the cum-dividend price)?(b) What is the ex-dividend price in a perfect capital market?(c) If the board instead decided to use the cash to do a one-time share repurchase, in a perfectcapital market, what is the price of the shares once the repurchase is complete?(d) In a perfect capital market, which policy do investors in the firm prefer?

We have to find the share price under three different situations: as-is with excess cash; price…

Natsam Corporation has $25 million of excess cash. The firm has no debt and 20 million shares outstanding. The operating assets are expected to generate free cash flows of 18 million per year starting from next year till infinity. Its asset cost of capital is 10%. Natsam's board has decided to pay out all this cash as a one-time dividend three days later. 1 (a) What is the current stock price (i.e., the cum-dividend price)? (b) What is the ex-dividend price in a perfect capital market? (c) If the board instead decided to use the cash to do a one-time share repurchase, in a perfect capital market, what is the price of the shares once the repurchase is complete? (d) In a perfect capital market, which policy do investors in the firm prefer?

Natsam Corporation has $25 million of excess cash. The firm has no debt and 20 million shares outstanding. The operating assets are expected to generate free cash flows of 18 million per year starting from next year till infinity. Its asset cost of capital is 10%. Natsam's board has decided to pay out all this cash as a one-time dividend three days later. 1 (a) What is the current stock price (i.e., the cum-dividend price)? (b) What is the ex-dividend price in a perfect capital market? (c) If the board instead decided to use the cash to do a one-time share repurchase, in a perfect capital market, what is the price of the shares once the repurchase is complete? (d) In a perfect capital market, which policy do investors in the firm prefer?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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1. . Assuming that shareholders expect no growth from their investment, what would the cost of equity be? 2. If retained earnings were used instead of new issuances, what would the cost of the new financing be?
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