Question

Shatin Intl. has 10 million shares, an equity cost of capital of 13% and is expected to pay a total dividend of $20 million each year forever. It announces that it will increase its payout to shareholders. Instead of increasing its dividend, it will keep it constant and will start repurchasing $10 million of stock each year as well. How much will its stock price increase?

Answer 1

Answer:

23.07 per share

Explanation:

$\frac{divends}{return-growth} = Intrinsic \: Value$

We will caltulate like the gordon model, but in this case growth= 0 and we are going to include the 10 millions stock repurchase in the dividend part of the equation.

Stock price= (future value of total dividends + repurchasing of stocks)/equity cost of capital)

(20 + 10)/0.13 = 230.77 MILLIONS

Then we divide by the number of shares:

230.77 MILLIONS/ 10 MILLIONS = 23.07 per share