Question

Valence Electronics has 223 million shares outstanding. It expects earnings at the end of the year of $ 850 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 7​% per​ year, these payout rates do not​ change, and​ Valence's equity cost of capital is 8​%, what is​ Valence's share​ price?

Answer 1

Valence's share price is $152.47

Step-by-step explanation:

Given:

Payout percent = 40% or 0.4 (includes 15% dividends and 25% repurchases)

Total earnings = $850,000,000

Cost of capital = 8%

Dividend growth rate = 7%

Total payout = 0.4 × 850,000,000 = $340,000,000

We need to compute present value of total payout (dividends and repurchases) which is computed as shown below:

Present value of payout =
`(Payout)/(Cost\ of\ capital\ -\ Growth\ rate)`

Present value of payout =
`(340,000,000)/(0.08\ -\ 0.07)`

= $34,000,000,000

Now compute price of share:

Price of share =
`(Present value of payout)/(Shares outstanding)`

=
`(34,000,000,000)/(223,000,000)`

= $152.47