Question

Question Help Tolo Co. plans the following repurchases: $10.4 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 million in four years. The total paid in dividends is expected to increase by 2.5% per year thereafter. If Tolo has 1.5 million shares outstanding and an equity cost of capital of 11.2%, what is its price per share today? The stock price will be $ (Round to the nearest cent.)

Answer 1

Solution: stock price= Present value of all future dividends Year a 1 2 3 cash flow PV factor at 11.2% PV factor working PV b formula=1/(1+r)^n a*b 10.40 0.89930 1/(1+0.112)^1 9.35 0.80871 1/(1+0.112)^2 0.00 20.30 0.72725 1/(1+0.112)^3 14.76 24.00 0.65400 1/(1+0.112)^4 15.70 282.76 0.65400 1/(1+0.112)^4 184.93 Current Value 224.74 4 V4** **Since growth is constant after year 3 V4=CF5/(r-g) 24*(1+0.025)/(0.112-0.025) 282.76 149.83 Price per share= 224.74/1.5 V4= value at the end of year 4 CF5= cash flow at the end of year 5 g=growth rate