Question

Tolo Co plans the following repurchases: 59.8 million in one year, nothing in two years, and $20.3 milion in three years. After that, it will stop repurchasing and will issue dividends totaling $24.9 million in four years. The total paid in dividends is expected to increase by 3.4% per year thereafter. If Tolo has 1.6 million shares outstanding and an equity cost of capital of 10.6%, what is its price per share today? The stock price will be $ (Round to the nearest cont.)

Answer 1

PV= CF/(1+R)ⁿ where, R is cost of equity , n is no of year, CF is cashflow

year cash flow to share holder PV of cash flow Cost of equity (r)

1 $ 9.8 M $8.86 M 10.6%

2 $0 $0 10.6%

3 $20.3 M $15 M 10.6%

4 $24.9 M + $357.59 M    $255.62 M       10.6%

Total PV $279.48 M   

There will be terminal cash flow at the end of year 4

terminal cash flow at year 4 = [CF₄ * (1+g)] / (r-g) where, CF₄ is Cash flow at end of year 4, g is dividend =[$24.9 M(1+0.034)] / (0.106-0.034)    growth rate, r is cost of equity

= $25.7466 M/ 0.072

= $357.59 M

Total market value of company is $279.48 M

Price per share = Total market value / No of outstanding share

= $279.48 M / 1.6 M

= $ 174.68

hence The stock price will be $ 174.68