Use the Information for the Question(s)below

question 22

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 repurchase shares.Suppose you are unhappy with Omicron's decision and would have preferred that Omicron used the excess cash to pay a special dividend.Detail exactly how you could create a homemade dividend that will provide you with the same combination of cash and stock that you would have received if Omicron paid the special dividend.

Analyze the implications of top-down and bottom-up planning approaches.

Grasp the concept and calculation of sustainable growth rate.

Interpret financial statements and execute financial forecasting.

Recognize the importance of combining various planning approaches for realistic financial forecasting.

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Definitions:

Contingent Immunization

A mixed passive-active strategy that immunizes a portfolio if necessary to guarantee a minimum acceptable return but otherwise allows active management.

Risk Tolerance

An investor's ability or willingness to endure market volatility and potential loss in the value of investments.

Life Cycle

The series of stages through which a product or project passes, from initial concept through growth, maturity, and eventual decline.

Tax-Deferral Option

The feature of the U.S. Internal Revenue Code that capital gains tax is assessed only when the asset is sold.