Question

Mr Pallete is the CEO of Telefonica, the company has 2 Million shares outstanding, and the PE ratio is 20. The company has bonds, which are being sold at 100%, for a total amount of 3 Millions. The company EBITDA is 55.000.000€, and the EPS is 25€. Mr. Pallete wants to stablish a fix dividend payment for the future which is consistent with the market value. Considering that the expected return is 10% and the growth rate is 0, what should be the value for the dividend?

Answer 1

To determine the value for the dividend that is consistent with the market value, we can use the dividend discount model (DDM) formula. The DDM formula states that the value of a stock is equal to the present value of its future dividends.

The formula for calculating the value of a stock using the DDM is as follows:

Stock Value = Dividend / (Required Rate of Return - Dividend Growth Rate)

In this case, we are given that the company has 2 million shares outstanding and the PE ratio is 20, which means the earnings per share (EPS) is €25. Since the growth rate is 0, the dividend growth rate is also 0.

Let's calculate the value of the dividend using the DDM formula:

Required Rate of Return = 10% or 0.10

Dividend = EPS = €25

Stock Value = €25 / (0.10 - 0)

Stock Value = €25 / 0.10

Stock Value = €250

Therefore, in order to establish a fixed dividend payment consistent with the market value, Mr. Pallete should set the dividend at €250 per share.