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Welsh Meds Plc Mini CaseWelsh Meds Plc is a small but rapidly growing biotechnologycompany in Cardiff with annual revenues of £115 million. Lastyear’s net income was £6.38 million. Founded in 2002 by CarwynThomas and Geraint Jones with the support of a venture capitalist,the firm’s success has been remarkable. After a three yeardevelopment phase, thecompany’s breakthrough was brought about by adrug called Enzyme Shield that was designed to treat immune systemdeficiencies (ISD). To fund the substantial increase in productioncapacity, which the owners decided should remain in-house, Carwynand Geraint took Welsh Meds public, thereby taking advantage of thefavorable stock market conditions of 2006. By issuing 2.8 millionshares at £19, £53.2 million of equity were raised. Two years ago,Welsh Meds made its first annual dividend payment of £0.40 whichincreased by 15% last year. Ten months ago, the company receivedthe Drug Administration Authority’s approval the mass market EnzymeShield Light, a derivative of its first drug was specificallytargets ISD in younger children. As a result, last quarter companyearnings are up 37%, compared to the previous quarter. Carwyn andGeraint are very optimistic about Welsh Meds’ future and wonder ifit is time to reward its shareholders with either a specialone-time dividend of £2.50 or an increase of the annual dividend by£1.00. William Stewart, the company’s CFO, however, suggests usinghalf of the accumulated cash of £12 million to initiate a buy back.In addition, Mr. Stewart would like to reduce the company’s debt by4 million, thereby maintaining a cash reserve of only £2 million.Recovering from the global financial crisis when shares of WelshMed fell by more than half, its current share price £17.38 isstill, down 32% from its peak £25.55 of summer 2007. However,Carwyn and Geraint are very optimistic that the economic recoverywill continue and that their company’s share price will reach newhighs within the next 2–3 years.QUESTIONSDo you think it was prudent to initiate annual dividend paymentsonly 3 years after the IPO?If a special one-time dividend was paid, how would it likelyaffect Welsh Meds’ share price?Would the share price reaction be different if the annualdividend was raised by £1.00 instead?What is the current dividend payout ratio and how would itchange if the annual dividend was raised by £1.00?Based on the current share price of £17.63, determine thecompany’s implied cost of capital according to the dividenddiscount model (DDM).What do you think about the owner’s optimistic view that theshare price will reach new highs in 2–3 years? Is a share price of£25.55 or higher realistic under the current dividend growth rateassumption?Is the commonly used DDM that assumes a constant and perpetualgrowth rate applicable to Welsh Meds? Explain.How would the suggested debt reduction affect the company’s P/Eratio, return on assets, and return on equity?How would the suggested share repurchase affect the company’sP/E ratio, return on assets, and return on equity?Would you regard a £2 million cash reserve as sufficient forWelsh Meds? Explain.