Use the Information for the Question(s)below

question 27

Essay

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 you own 4000 shares of Omicron stock and that Omicron uses the entire $50 million to pay a special dividend.Suppose you are unhappy with Omicron's decision and would have preferred that Omicron used the excess cash to repurchase stock.Detail exactly how you could undo the dividend in a way that will provide you with the same combination of cash and stock that you would have received if Omicron had not paid the special dividend.

---

Definitions:

Debt Guarantee

An arrangement where a third party promises to assume the debt obligation of a borrower if that borrower defaults.

Investment Account

An account held by an individual or entity with a financial institution for the purpose of trading or holding investments.

Stock Issuance

The process by which a company distributes its shares to investors, thereby raising capital.

Investment Account

An account held at a financial institution or brokerage that is used by investors to hold and manage securities, such as stocks, bonds, mutual funds, and other investment products.