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Taggart Transcontinental pays no dividends, but spent $4 billion on share repurchases last year. Taggart's equity...

Taggart Transcontinental pays no dividends, but spent $4 billion on share repurchases last year. Taggart's equity cost of capital is 13% and the amount spent on repurchases is expected to grow by 5% per year. Taggart currently has 2 billion shares outstanding. Taggart's market capitalization is closest to:

A. $25 billion

B. $31 billion

C. $40 billion

D. $50 billion

Solutions

Expert Solution

Amount spent on share repurchase last year(SR0) = $4 billion

Amount spent on repurchase are expected to grow by(g) = 5% per year

Equity Cost of Capital(Ke) = 13%

Calculating the market Capitalization of company using Gordan's Growth Model:-

Market Capitalization = SR0(1+g)/(Ke-g)

Market Capitalization = $4 billion*(1+0.05)/(0.13-0.05)

= $4.2 billion/0.08

Market Capitalization = $52.5 billion

So, Taggart's market capitalization is closest to $50 billion

Option D

jeff jeffy answered 2 years ago
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