Question

Tolo Co. plans the following​ repurchases: $ 10.3 million in one​ year, nothing in two​ years, and $ 19.3 million in three years. After​ that, it will stop repurchasing and will issue dividends totaling $ 25.1 million in four years. The total paid in dividends is expected to increase by 2.7 % per year thereafter. If Tolo has 1.9 million shares outstanding and an equity cost of capital of 10.6 %​, what is its price per share​ today?

Answer 1

Value of Equity = [Payout in Year 1 / (1 + r)] + [Payout in Year 2 / (1 + r)²] + [Payout in Year 3 / (1 + r)³] + [Payout in Year 4 / (1 + r)⁴] + [{Payout in Year 4 * (1 + gC)} / {(r - gC) * (1 + r)⁴}]

= [10.3 / (1 + 0.106)] + [0 / (1 + 0.106)²] + [19.3 / (1 + 0.106)³] + [25.1 / (1 + 0.106)⁴] + [{25.1 * (1 + 0.027)} / {(0.106 - 0.027) * (1 + 0.106)⁴}]

= 9.31 + 0 + 14.27 + 16.77 + 218.07 = 258.42, or $258.42 million

Share Price = Value of Equity / Shares Outstanding = 258.42 / 1.9 = $136.01