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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.
-Assume that Vezuvo uses the entire $75 million in excess cash to pay a special dividend. The amount of the regular annual dividends in the future is closest to:
A)$5.00.
B)$9.00.
C)$6.00.
D)$7.50.

Question

Quizplus · Accepted Answer

The firm expects to generate additional free cash flows of $50 million per year, which will be paid out as regular dividends. With 10 million shares outstanding, the annual dividend per share would be $50 million / 10 million shares = $5.00.

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