RYBR Inc., an all-equity firm, has net income of £100 million currently and expects this number to grow at 10% a year for the next three years. The firm’s working capital increased by £10 million this year and is expected to increase by the same £ amount each of the next three years. The depreciation is £50 million and is expected to grow 8% a year for the next three years. Finally, the firm plans to invest £60 million in capital expenditure for each of the next three years. The firm pays 60% of its earnings as dividends each year. RYBR has a cash balance of £50 million today.
(a) Assuming that the cash does not earn any interest, how much would you expect to have as a cash balance at the end of the third year?
(b) Assume that RYBR had financed 20% of its reinvestment needs with debt, estimate the cash balance at the end of the third year.
(c) Now assume that stockholders in RYBR are primarily corporations. They are exempt from ordinary taxes on 85% of the dividends that they receive (Ordinary tax rate=30%), and pay capital gains on price appreciation at a 20% rate. If RYBR pays a dividend of £2 per share, how much would you expect the stock price change to be on the ex-dividend date?