Use the Information for the Question(s)below

question 87

Multiple Choice

Use the information for the question(s) below.
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 to repurchase shares.The amount of the regular yearly dividends in the future is closest to:

• A)$9.00.
• B)$5.00.
• C)$4.50.
• D)$4.00.

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Definitions:

Cash Equals

Refers to the value of assets within a company that are in liquid form and can be readily converted to cash.

Share Income

Income earned by shareholders from their investments in a company, often referred to as dividends.

Capital Balances

The amount of money that each partner in a partnership has contributed and retains in the business.

Noncash Assets

Assets that are physical or intangible properties owned by a business, which are not in the form of cash or easily convertible to cash.