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Omicron 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.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron'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.
-Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.Omicron's ex-dividend price is closest to:
A)$40.00.
B)$5.00.
C)$50.00.
D)$45.00.

Question

Quizplus · Accepted Answer

The correct answer is A.The ex-dividend price is the price of a stock after the dividend has been paid. In this case, the special dividend is $5 per share, so the ex-dividend price will be $5 less than the current price of $50. Therefore, the ex-dividend price is $45.

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