Question

Tolo Co. plans the following repurchases: $10 million in one year, nothing in two years, and $20 million in three years. After that, it will stop repurchasing and will issue dividends totaling $25 million in four years. The total paid in dividends is expected to increase by 3% per year thereafter. If Tolo has 2 million shares outstanding and an equity cost of capital of 11%, what is its price per share today?

Answer 1

Price per share = $126.07 per shares

Step-by-step explanation:

Price of all share at the end of year 3 = Dividend in year 4 / (Cost of capital - growth rate)

Price of all share at the end of year 3 = $25 million / (0.11 - 0.03)

Price of all share at the end of year 3 = $312.5 million

Year Event Cash Inflows P.value factor Present value of

at 11% [1/(1-r)^n] cash flow

1 Repurchase $10 million 0.9009 $9,010,000

2 Repurchase $20 million 0.7312 $14,620,000

3 Repurchase $312.5 million 0.7312 $228,500,000

Value of all shares today $252,130,000

Price per share = Value of all shares today / Total shares

Price per share = $252,130,000 / 2,000,000 shares

Price per share = $126.07 per shares