Windsor Inc is an unleveraged fim, which has $300 million cash. It expects future free cash...

 

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Windsor Inc is an unleveraged fim, which has $300 million cash. It expects future free cash flows of $150 million per year. Windsor's management is considering a new investment opportunity, which will cost them $300 million and subsequently it will increase future free cash flows to $165 million per year. Altematively, Windsor could use the $300 million to repurchase some of its 250 million outstanding shares. (Note: ignore the signalling effect of share repurchases) a. If the cost of capital of Windsor's investments is 7% p.a., what effect would each option have on the share price (i.e., making the new investment vs. share repurchases)? (6 marks) b. Assuming a perfect market, which option would Windsor's shareholders prefer? Why? (2 marks) After a number of management meetings, Windsor's managers have changed their mind c. and decided to make a dividend payment instead of investing in that project or making share repurchases. They can either distribute an immediate dividend using the $300 million or invest the $300 million in one-year Treasury bills paying 5% p.a. interest, and then pay a higher dividend next year. In a perfect capital market, which option will shareholders prefer? (2 marks) d. Suppose Windsor chooses to distribute a higher dividend next year, how would an investor who prefers to receive an immediate dividend create it on his own? Show your calculations. (3 marks) Windsor Inc is an unleveraged fim, which has $300 million cash. It expects future free cash flows of $150 million per year. Windsor's management is considering a new investment opportunity, which will cost them $300 million and subsequently it will increase future free cash flows to $165 million per year. Altematively, Windsor could use the $300 million to repurchase some of its 250 million outstanding shares. (Note: ignore the signalling effect of share repurchases) a. If the cost of capital of Windsor's investments is 7% p.a., what effect would each option have on the share price (i.e., making the new investment vs. share repurchases)? (6 marks) b. Assuming a perfect market, which option would Windsor's shareholders prefer? Why? (2 marks) After a number of management meetings, Windsor's managers have changed their mind c. and decided to make a dividend payment instead of investing in that project or making share repurchases. They can either distribute an immediate dividend using the $300 million or invest the $300 million in one-year Treasury bills paying 5% p.a. interest, and then pay a higher dividend next year. In a perfect capital market, which option will shareholders prefer? (2 marks) d. Suppose Windsor chooses to distribute a higher dividend next year, how would an investor who prefers to receive an immediate dividend create it on his own? Show your calculations. (3 marks)

Answer rating: 100% (QA)

a In case of making the New Investment Incremental Cashflows 165150 15 million per year NPV million ... View the full answer