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Company B's board is meeting to decide how to pay out $20 million in excess cash...

Company B's board is meeting to decide how to pay out $20 million in excess cash to shareholders. The company has 10 million shares outstanding, no debt, faces an equity cost of capital = WACC = 12%, and expects to generate future free cash flows of $48 million per year forever that will be paid out to shareholders as dividends each period.. Calculate each shareholders' wealth if the company decides to pay out the $20 million excess cash immediately by repurchasing stock.

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Answer #1
Present value of annuity = Annuity / Required rate of return
Present value of Free cash flow = 48 / 12%
Present value of Free cash flow = 400
Present value per share = Present value of cash flow / Number of shares outstanding
Present value per share = 400 / 10
Present value per share = 40
If company repurchases shares
Number of shares repurchased = 20 / 40
Number of shares repurchased = 0.5
Shares outstanding after repurchase = 10 - 0.5
Shares outstanding after repurchase = 9.5
Present value per share after repurchase = 400 / 9.5
Present value per share after repurchase = 42.11
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