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expect Tiger Company will pay a dividend of $60 million and repurchase $90 million of its...

expect Tiger Company will pay a dividend of $60 million and repurchase $90 million of its common shares next year (Year 1) with both expected to grow 6% in Year 2 and 7% in Year 3. If you expect the company to be sold for $15 billion at the end of Year 3, and you have calculated the cost of equity to be 7.6%, what do you estimate the true value of the company’s net worth to be now?

First draw a timeline

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Answer #1

Repurchase of share will result in cash inflow only. Share price today is nothing but present value of all cash inflow

Statement showing company’s net worth now

Year Dividend Repurchase of shares Price of company after 3 years Total cash inflow PVIF @ 7.6% PV
A B C D =A + B+ C E F = D x E
1 60.00 90.00 150.0000 0.9294 139.41
2 63.60 95.40 159.0000 0.8637 137.33
3 68.05 102.08 15000 15170.1300 0.8027 12177.34
Value of company today 12454.08

Thus networth of company today = $12454 million

Timeline of cash inflow

Amount in million

  

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