Valence Electronics has 223 million shares outstanding. It expects earnings at the end of the year of $ 850 million. Valence pays out 40% of its earnings in total - 15% paid out as dividends and 25% used to repurchase shares. If Valence's earnings are expected to grow by 7% per year, these payout rates do not change, and Valence's equity cost of capital is 8%, what is Valence's share price?

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almatheia almatheia · Answer 1 · 2019-10-23T05:51:08+02:00

Answer:

Valence's share price is $152.47

Explanation:

Given:

Payout percent = 40% or 0.4 (includes 15% dividends and 25% repurchases)

Total earnings = $850,000,000

Cost of capital = 8%

Dividend growth rate = 7%

Total payout = 0.4 × 850,000,000 = $340,000,000

We need to compute present value of total payout (dividends and repurchases) which is computed as shown below:

Present value of payout = [tex]\frac{Payout}{Cost\ of\ capital\ -\ Growth\ rate}[/tex]

Present value of payout = [tex]\frac{340,000,000}{0.08\ -\ 0.07}[/tex]

= $34,000,000,000

Now compute price of share:

Price of share = [tex]\frac{Present value of payout}{Shares outstanding}[/tex]

= [tex]\frac{34,000,000,000}{223,000,000}[/tex]

= $152.47