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Vezuvo Technologies has $75 million in excess cash and no debt. The firm expects to generate additional free cash flows of $50 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Vezuvo's unlevered cost of capital is 10% and there are 10 million shares outstanding. Vezuvo's board is meeting to decide whether to pay out its $75 million in excess cash as a special dividend or to use it to repurchase the firm's shares.
-Vezuvo's enterprise value is closest to:
A)$500 million.
B)$450 million.
C)$400 million.
D)$600 million.

Question

Quizplus · Accepted Answer

Vezuvo's enterprise value is calculated by taking the present value of its future free cash flows. With $50 million expected annually and an unlevered cost of capital of 10%, the enterprise value is $50 million / 0.10 = $500 million.

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