Question

Suppose Amazon In. pays no dividends but spent $2.95 billion on share repurchases last year. If Amazon’s equity cost of capital is 8.1%, and if the amount spent on repurchase is expected to grow by 6.9% per year, estimate Amazon’s market capitalization (this is the market value of its equity). If Amazon has 450 million shares outstanding, what stock price does this correspond to?

Answer 1

Market capitalization = $262.80 bil

Stock price = $584.00 per share

Step-by-step explanation:

Share repurchase and cash dividend have the same nature, which is distributions made to shareholders of company. So, we can apply Dividend Discount Model (DDM) to value the stock of Amazon.

DDM is stated as below:

V_o = [D_o x (1 + g)]/(r - g), where:

V_o: Current intrinsic value of the company;

D_o: Current dividend/Share repurchased in cash;

g: Dividend growth;

r: cost of equity.

Putting all the number together, we have:

V_o = [2.95 x (1 + 6.9%)]/(8.1% - 6.9%) = $262.80 bil

Amazon stock price = Market capitalization/number of shares outstanding = $262.80 bil/450 mil = $584.00 per share