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31 Jan 2019

The different ways in which a firm can pay dividends to its shareholders and their impact to the share price.

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Jarrod Robel
Jarrod RobelLv2
2 Feb 2019

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Rally Inc. is an all-equity firm with assets worth $25 billion and billion shares outstanding. Rally plans to borrow $10 billion and use these funds to repurchase shares. The firms corporate tax rate is 35%, and Rally plans to keep its outstanding debt equal to $10 billion permanently.

A. Without the increase in leverage, what would Rally's share price be?

B. Suppose Rally offers $2.75 per share to repurchase its shares. Would shareholders sell for this price?

C. Suppose Rally offers $3.00 per share and shareholders tender their shares at this price. What will Rally's share price be after the repurchase?

D. What is the lowest price Rally can offer and have shareholders tender their shares? What will be its stock price after the share repurchase in that case?

In your own words, describe how Net Present Value / Time Value of Money concept might be useful in your work environment...specifically what impact might the net present value of expected cash flows have on your decision to pay or not to pay dividends to shareholders of your firm (Walt Disney Company)

Which of the following are ways a firm can reduce cash flows to prevent managers from wastefully spending excess cash flow? Select all that apply.

a) Pay its excess cash flows to the shareholders in the form of higher dividends

b) increase the amount of debt in the firm's target capital structure in the hope that higher debt-service requirements will force managers to be more disciplined

c) Funnel excess cash flows back to the shareholders through stock repurchases

d) minimize the amount of debt in the firm's capital structure so the firm will be able to borrow money at a reasonable rate when good investment opportunities arise

e) distribute excess funds to the firm's bondholders by paying more interest expense than it is legally obligated to pay.

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