Webster Inc. generates $20 million in free cash ows each year in perpetuity and has $25 million in excess cash. Assume that there are no taxes for this problem. The appropriate discount rate for the company is 8%. The company is currently entirely nanced with equity. There are 5 million shares outstanding. Assume that all payments by Webster Inc. occur at the end of the year.
a. What is the current value of the rm's equity?
b. What is the current price per share?
c. Suppose the company is considering paying out all of its excess cash as a dividend, and pay out all of its free cash ow through dividends each year thereafter. What is the ex-dividend share price?
d. Suppose that Webster Inc. is considering using its excess cash to repurchase shares in the open market. How many shares can the company repurchase?
e. What is the price before and after the share repurchase? What is the future dividend per share after the repurchase?
f. Suppose that you own 5,000 shares of Webster Inc. and that you receive its excess cash as a dividend. After receiving this dividend, what is the value of your portfolio in cash and stock? Show how you can replicate a portfolio as if Webster instead used the excess cash to repurchase shares.