Question

Tolo Co. plans the following repurchases: $10 million in one year, nothing in two years, and $20 million in three years. After that, it will stop repurchasing and will issue dividends totaling $25 million in four years. The total paid in dividends is expected to increase by 3% per year thereafter. If Tolo has 2 million shares outstanding and an equity cost of capital of 11%, what is its price per share today?

Answer 1

Answer:

Price per share = $126.07 per shares

Explanation:

Price of all share at the end of year 3 = Dividend in year 4 / (Cost of capital - growth rate)

Price of all share at the end of year 3 = $25 million / (0.11 - 0.03)

Price of all share at the end of year 3 = $312.5 million

Year Event           Cash Inflows   P.value factor        Present value of

                                                       at 11% [1/(1-r)^n]        cash flow

1     Repurchase    $10 million             0.9009               $9,010,000

2    Repurchase    $20 million            0.7312                 $14,620,000

3    Repurchase    $312.5 million        0.7312                 $228,500,000  

Value of all shares today                                                $252,130,000

Price per share = Value of all shares today / Total shares

Price per share = $252,130,000 / 2,000,000 shares

Price per share = $126.07 per shares