OrangeTree Corporation’s value of operations is estimated to be $550 million. OrangeTree has $100 million in debt (it has no preferred stock) and 10 million shares of common stock outstanding. Suppose OrangeTree has decided to distribute $50 million, which it presently is holding in very liquid short-term investments.
a. Assume that OrangeTree has not yet made the distribution. What is OrangeTree’s intrinsic value of equity? What is its intrinsic per share stock price?
b. Now, suppose that OrangeTree has just made the $50 million distribution in the form of dividends. What is OrangeTree’s intrinsic per share stock price after this dividend payment?