Assume that IWT has completed its IPO and has a $112.5 million capital bud-get planned for the coming year. You have determined that its present capital structure (80% equity and 20% debt) is optimal, and its net income is forecasted at $140 million. Use the residual distribution approach to determine IWT’s total dollar distribution. Assume for now that the distribution is in the form of a dividend. Suppose IWT has 100 million shares of stock outstanding. What is the forecasted dividend payout ratio? What is the forecasted dividend per share? What would happen to the payout ratio and DPS if net income were forecasted to decrease to $90 million? To increase to $160 million?

(2) In general terms, how would a change in investment opportunities affect the payout ratio under the residual distribution policy?

(3) What are the advantages and disadvantages of the residual policy? (Hint: Don’t neglect signaling and clientele effects.)

d. (1) Describe the procedures a company follows when it makes a distribution through dividend payments.

(2) What is a stock repurchase? Describe the procedures a company follows when it makes a distribution through a stock repurchase.

e. Discuss the advantages and disadvantages of a firm repurchasing its own shares.

f. Suppose IWT has decided to distribute $50 million, which it presently is holding in liquid short-term investments. IWT’s value of operations is estimated to be about $1,937.5 million; it has $387.5 million in debt and zero preferred stock. As mentioned previously, IWT has 100 million shares of stock outstanding.

(1) Assume that IWT has not yet made the distribution. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share?

2) Now suppose that IWT has just made the $50 million distribution in the form of dividends. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share?

(3) Suppose instead that IWT has just made the $50 million distribution in the form of a stock repurchase. Now what is IWT’s intrinsic value of equity? How many shares did IWT repurchase? How many shares remained outstanding after the repurchase? What is its intrinsic stock price per share after the repurchase?