Omicron Technologies Has $60 Million in Excess Cash and No

Omicron Technologies has $60 million in excess cash and no debt. The firm expects to generate additional free cash flows of $48 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 9% and there are 12 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $60 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 $60 million in excess cash to pay a special dividend. Omicron's cum-dividend price is closest to ________.

A) $39.56
B) $59.33
C) $98.89
D) $49.44

Correct Answer:

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