Question: SECTION A Answer FOUR questions from this section. Question 1 Assume that Lyra plc's free cash-flows grow at 5% per year forever. This growth is

SECTION A Answer FOUR questions from this section. Question 1 Assume that Lyra plc's free cash-flows grow at 5% per year forever. This growth is not affected by the firm's pay out policy. The first free cash flow per share in the next year (year 1) will be $3. The discount rate is 15%. Lyra plc is considering two potential pay out policies: Policy A: Pay out all free cash flows as dividends. The first dividend will be paid in year 1. a) What is the share price today? (6 marks) b) What will be the cum-dividend and ex-dividend prices in year 1 and year 2? (5 marks) Policy B: Lyra plc uses year 1's free cash flow to repurchase shares. After the repurchase, the firm will pay out all future free cash flows as dividends starting from year 2. a) What fraction of total shares can be repurchased in year 1? What is the dividend per share in year 2 and year 3? (6 marks) b) What is the ex-dividend price and cum-dividend price in year 2? (3 marks) (Total 20 marks)

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