Babbio Corp. has $25 million in excess cash and no debt. Apart from the excess cash, the firm expects to generate additional free cash flows of $50 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Babbios unlevered cost of capital is 10% and there are 10 million shares outstanding. Babbios board is meeting to decide whether to pay out its $25 million in excess cash as a special dividend or to use it to repurchase shares of the firms stock. Ignore taxes.

(a) Assume that Babbio uses the excess cash of $25 million to pay a special dividend. Determine future regular yearly dividend per share and share price immediately after (ex-dividend) and immediately before (cum-dividend) the special dividend.

(b) Assume that Babbio uses the excess cash of $25 million to repurchase shares. Determine future regular yearly dividend per share.