5. Wallazon (ticker WAZ) is a new firm that specializes in the sale of highly pr

Question

5. Wallazon (ticker WAZ) is a new firm that specializes in the sale of highly profitable walls on-line to generate excess free cash flows to (i) subsidize Wallazon web services, (ii) pay regular dividends, and (iii) do share repurchases. Wallazon,pays regular dividends of $1 per share each quarter. The price of Wallazon stock was S40 at the beginning of the year. It is expected to be $45 at the end of the year. a) What is the expected annual rate of return on WAZ stock? b) Why would Wallazon's Board of Directors also authorize share repurchases instead of simply increasing regular dividends? c) If WAZ stock is expected to grow at the rate calculated in a) indefinitely, how long would it take (in years and partial years) to double, assuming annual compounding? d) Wallazon grows, and its founder Samantha Bezos, becomes the richest person in the world. If Wallazon engaged in positive NPV projects, such as acquiring both Amazon and Walmart in hostile takeovers, how could it go about financing these acquisitions? (Hint: discuss retained earnings, debt issuance, and equity issuance - and payout policy) e How could Wallazon enhance retained earnings by changing payout policy to help finance acquisitions such as those mentioned in d)? What are the costs and benefits of doing so?

Explanation / Answer

1.
=(45+1+1+1+1)/40-1=22.5%
2.
Share repurchase is done when share is undervalued and hence to signal investors that share is undervalued, they will authorise share repurchase instead of regular dividend
3.
=>1.225^n=2
=>n=log(2)/log(1.225)=3.41 years
4.

it would first try to use internal accruals that is retained earnings and also try to cut dividend payout and if that is not sufficient issue debt and and if that is not sufficient issue equity

5.

if less payout is made, more can be retained and hence cutting dividend payout ratio increases retained earnings and the retained earnings can be invested in positve NPV projects

Costs: Many investors prefer dividends and hence would not be interested in this stock
Benefits: Lower cost of financing, no issuance or underwriting costs

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