You are trying to value the stock of XYZ Corp. Total earningsfor year 1 are...

You are trying to value the stock of XYZ Corp. Total earnings for year 1 are forecasted to be $115 million. You know that the company plans on paying out 33% of its earnings in the form of dividends and 23% in the form of share repurchases each year, and that all of the growth in future earnings will be through retained earnings. The company's return on new investment is 15%, its cost of equity is 12% and it has 136 million shares outstanding. Given this information, estimate the current share price for XYZ Corp. Round your answer to two decimals (do not include the $-symbol in your answer).

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Expert Solution

The price is computed as follows:

= [ (Earnings / Number of shares outstanding) x (33% + 23%) ] / (cost of equity - growth rate)

growth rate is computed as follows:

= return on investment x (1 - dividend - share repurchases)

= 0.15 x (1 - 0.33 - 0.23)

= 0.066

So, the price will be as follows:

= [ ($ 115 million / 136 million) x 56% ] / (0.12 - 0.066)

= $ 0.473529412 / 0.054

= $ 8.77

jeff jeffy answered 2 years ago

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