Question

Suppose Compco Systems pays no dividends but spent $ 5.19 billion on share repurchases last year. If​ Compco's equity cost of capital is 11.5 %​, and if the amount spent on repurchases is expected to grow by 8.5 % per​ year, estimate​ Compco's market capitalization. If Compco has 6.8 billion shares​ outstanding, to what stock price does this​ correspond?

Answer 1

Answer: Compco's market capitalization will be $187.71 billion; $27.6 per share.

Explanation:

Market capitalisation:

= CF0(1+g)/(Rs-g)

where,

RS= 11.5% = 11.5/100 = 0.115

g = 8.5% = 8.5/100 = 0.085

= 5.19(1+0.085)÷(0.115-0.085)

= 5.19 × 1.085 /0.03

= $187.71

Compco's market capitalization will be $187.71 billion

stock price:

= 187.71/6.8 = $27.6 per share

Therefore, if Compco has 6.8 billion shares​ outstanding, this will correspond to a stock price of $27.6 per share.