Question

The Rufus Corporation has 125 million shares outstanding and analysts expect Rufus to have earnings of $500 million this year. Rufus plans to pay out 40% of its earnings in dividends and they expect to use another 20% of their earnings to repurchase shares. If Rufus' equity cost of capital is 15% and Rufus' earnings are expected to grow at a rate of 3% per year, then the value of a share of Rufus stock is closest to

Answer 1

$20 per share

Step-by-step explanation:

WACC, k = 0.15,

Expected growth rate of earnings, g = 0.03

Dividends pay out:

= 40% of earnings

= 40% × $500,000,000

= $200 million

Shares repurchases:

= 20% of earnings

= 20% × $500,000,000

= $100 million

Value of shares:

= Present Value of future dividends and repurchases

= (Dividends + Shares repurchases) ÷ (WACC - g)

= ($200 + $100) ÷ (0.15 - 0.03)

= 300 ÷ (0.15 - 0.03)

= $2,500 million

Price per share, P0:

= Value of shares ÷ shares outstanding

= $2,500 million ÷ 125 million

= $20 per share