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What is the current price-p0

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Alpha Corporation has just paid its annual dividend and is looking forward to another successful year ahead. The company had free cash flow for the year just ended of $1 billion, all of which it just paid out to its shareholders as a dividend. Right now, shareholders do not believe that Alpha has any growth opportunities, so they expect the annual cash flow and dividend stream to remain unchanged for the foreseeable future. Alpha has 100 million shares outstanding. The company is entirely equity-financed. The cost of equity for the company is estimated to be 10%. The capital market is efficient and there is no tax.

Alpha's CEO now proposes that the company skip its dividend one year from now and instead repurchase its stocks, using the entire amount of the coming year's $1 billion free cash flow. What will the price at the end of next year, P1, be? What is the current price, P0?

Reference no: EM132694648

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