Question

What is the expected stream of dividends per share for an investor who plans to retain his shares rather than sell them back to the company? Check your estimate of share value by discounting this stream of dividends per share

Answer 1

Answer:

$17.14

Explanation:

29/149)+0.02 = 21.46%= Discount rate

Year 1

=(1+.2146)*149 = $180.98

Company repurchases = 73,805/180.98 = 408 shares

Number of shares outstanding = 5,090-408 = 4,682 shares

Dividend payment in year 1 falls to 5,090 x 14.50 = 73,805 which is equivalent to 73,805/(5090-408) = $15.76/share

P1 = $180.98

g = 2%

Expected Div2 = Div1*1.02 = $15.76*1.02 = $16.08

The required rate for year 2

r2 = Div2/P1+g = 16.08/180.98+0.02 = 0.1088 = 10.88%

Year 2

P2 = P1*(1+r2) = 180.98*(1+0.1088) = $200.68

Total dividend payment expected to grow ar 2%, So

73,805*1.02 = 75,281= amount used for repurchase

Hence number of shares repurchaes

73,805/200.68 = 375 shares

Number of shares oustanding = 4,682-375= 4,307 shares

DIV2 = 73,805/4,463 = $17.14