Question

Suppose Compco Systems pays no dividends but spent $ 4.92 billion on share repurchases last year. If​ Compco's equity cost of capital is 12.6 %​, and if the amount spent on repurchases is expected to grow by 8.9 % per​ year, estimate​ Compco's market capitalization. If Compco has 6.3 billion shares​ outstanding, to what stock price does this​ correspond?

Answer 1

$144.81 bil or $22.99 per share

Step-by-step explanation:

We can apply discounted dividend model (DDM) to value the stock in this example because share repurchase is equivalent to cash dividend, which are both cash paid out to shareholders of the company.

DDM is stated as below:

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

V_o: Intrinsic value of the company

D_o: Current dividend or Share repurchased in cash;

g: Dividend growth;

r: cost of equity.

Putting all the number together, we have:

V_o = [4.92 x (1 + 8.9%)]/(12.6% - 8.9%) = 144.81 bil or 144.81/6.3 = 22.99 per share