Tilly Corporation currently has $30 million in cash and no debt. The corporation expects future cash flows of $10 million per year indefinitely and will pay out these cash flows as dividends. Tilly Corporation has an unlevered cost of capital of 5% and there are 8 million shares outstanding. The board members are discussing whether to pay out its $30 million cash as a special dividend or to use it to repurchase shares of the corporation’s stock. Assume perfect capital market assumptions hold.

Q2.1 Assume that Tilly Corporation uses all the cash to repurchase shares. What is the share price of Tilly Corporation before the repurchase?

Q2.2 What is the amount of the future regular yearly dividend per share?

Q2.3 Suppose that you are unhappy with Tilly Corporation’s decision to repurchase shares and would prefer that the firm used the cash to pay a special dividend. Assuming you have 1 share in Tilly, what is the dividend that you would have received if Tilly Corporation had paid a special dividend with its cash instead or repurchasing shares?

Q2.4 Assume that you own 1,000 shares of Tilly Corporation stock. What is the number of shares that you would have to sell to receive the same amount of cash you would have received if Tilly Corporation had paid out its cash as a special dividend?

Answer rating: 100% (QA)

Q1 The share price of Tilly Corporation before the repurchase would be 30 million 8 million 375 The ... View the full answer