Yuletide Inc. is a manufacturer of Christmas ornaments. The firm earned $100 million last year and paid out 20% of its earnings as dividends. The firm also has bought back $180 million of stock over the past four years, in varying amounts each year. The firm is in stable growth, expects to grow 5% a year in perpetuity, and has a cost of equity of 12%.

a. Assuming that the dividend payout ratio will not change over time, estimate the value of equity.

b. How would your answer change if your dividend payout ratio is modified to include stock buybacks?