Reference no: EM133056885

Windsor Inc is an unleveraged firm, 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 $165million per year. Alternatively, 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)?

b. Assuming a perfect market, which option would Windsor's shareholders prefer? Why?

c. After a number of management meetings, Windsor's managers have changed their mind 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?

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.