Question

Valence Electronics has 211 million shares outstanding. It expects earnings at the end of the year of $820 million. Valence pays out 40% of its earnings in total - 15% paid out as dividends and 25% used to repurchase shares. If Valence's earnings are expected to grow by 5% per year, these payout rates do not change, and Valence's equity cost of capital is 8%, what is Valence's share price? A. $41.46 B. $15.55 C. $51.82 D. $7.77

Answer 1

Solution - Expected earning at year end $820 million Expected Dividend (D,J =) = 15% of Earnings 0.15 X $820 million $123 million Expected Repurchases (R1) 25% of earnings 0.25 x $ 820 million $205 million Cost of equity ( re) 8). Og 0.08 Growth rate for Earnings (9)=5% or 0.05

we will calculate value of Equity by total payout model value of equity expected Divid end t expected Repuschases cost of Equity - Growth rate $123 million t $205 million 0.08 - 0,05 $ 328 million 0,03 = $10.933.33 million Valence's share Price = value of Equity No. of shares outstanding

= $10,433,33 million 2 11 million $51.8167299 $51.82 So, the ought option is (c) $51.82