1. You expect Amalgamated Company will pay $80 million in dividends and repurcha

Question

1. You expect Amalgamated Company will pay $80 million in dividends and repurchase $70 million of its stock over the next 12 months (Year 1). You expect dividends and share repurchases to grow 10% in Year 2 and 9% in Year 3, and you expect Amalgamated to be bought by a larger competitor at the end of Year 4 for $3.8 billion. If all payments are made at year end, and you’ve calculated the cost of equity to be 11%, what do you estimate the value of Amalgamated’s net worth to be now? (Draw a timeline.)

2. If Amalgamated of Q #1 currently has 100,000,000 shares outstanding, what is your estimated value per share now?

Explanation / Answer

..

(80 + 70)

= 150

(150*1.10)

= 165

(165*1.09)

= 179.85

1)Estimated value of Amalgamated’s net worth to be now = 2903.74 million

..

2) If Amalgamated of Q #1 currently has 100,000,000 shares outstanding, estimated value per share now

= 2903.74m/100

= $29.04 per share

(80 + 70)

= 150

(150*1.10)

= 165

(165*1.09)

= 179.85

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