Josh Enterprises (JE) is an all-equity firm with $50 million in excess cash this year. Currently, it has 10 million shares in issue. Other firms with similar business risk have an unlevered cost of capital of 10%. From next year, JE will be generating additional free cash flows of $40 million per year in perpetuity which it intends to distribute as regular dividends. JE’s board of directors are considering whether to distribute the current $50 million in excess cash as a special dividend or to use it to repurchase JE's shares.
Assume that you own 2500 shares of JE’s stock and JE uses the entire $50 million to pay a special dividend. Suppose you are unhappy with JE’s decision and would prefer that JE used the excess cash to repurchase shares. Would you have to buy or sell shares to undo the effect of the payment of special dividend? How many shares would you have to buy or sell?