Question

Suppose Compco Systems pays no dividends but spent $ 5.18 billion on share repurchases last year. If​ Compco's equity cost of capital is 11.5 %​, and if the amount spent on repurchases is expected to grow by 7.9 % per​ year, estimate​ Compco's market capitalization. If Compco has 5.8 billion shares​ outstanding, to what stock price does this​ correspond? ​Compco's market capitalization will be ​$ nothing billion. ​(Round to two decimal​ places.) ​Compco's stock price will be ​$ nothing. ​(Round to the nearest​ cent.)

Answer 1

Market capitalization - $155.26

Stock price - $26.77

Step-by-step explanation:

The computation of the market capitalization is shown below:

= last year dividend × (1 + growth rate) ÷ (cost of capital - growth rate)

= $5.18 billion × ( 1 + 7.9%) ÷ (11.5% - 7.9%)

= $5.58,922 billion ÷ 3.6%

= $155.26

And, the stock price would be

= Market capitalization ÷ outstanding shares

= $155.26 ÷ 5.8 billion

= $26.77