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ICC currently has 50M common shares outstanding worth $10 per share and no debt.
ICC currently has 50M common shares outstanding worth $10 per share and no debt. It has a perpetual random cash flow with mean $25M (assume no depreciation and no taxes, so this is really sales minus cost = earnings). All annual cash flow ICC generates is paid to investors in annual dividends. Investors require a 5% return to hold the shares (cost of capital). John, the largest shareholder, owns 5M shares.
What is ICC's current market value (V), earnings per share (EPS), and share price (p)? What is John's percent ownership (α) and dollar investment in ICC?
Suppose now that ICC issues $100M in new equity and invests all of it in activities which generate no cash flow. Explain how this affects ICC's market value (V), earnings per share (EPS), and share price (p), as well John's percent ownership (α) and dollar investment in ICC.
New shareholders will require a 5% annual return on their dollar investment in ICC (ICC's cost of capital); this return comes solely in promised annual dividends from ICC. (3) Think first how the transaction will ultimately affect ICC's value and about the resulting divide between new and old shareholders. Then think what happens to the share price at the announcement of the transaction, and then think about the exact details of how the transaction would take place.
Suppose instead ICC will raise $100M in new equity to fund a new project (in the same line of business as its current operations) with an incremental perpetual cash flow of $5M per year that will be paid out as (additional) annual dividends to investors. Explain how this affects ICC's market value (V), earnings per share (EPS), and share price (p), as well John's percent ownership (α) and dollar investment in ICC.
