P 7-22 (similar to) Question Help Zoom Enterprises expects that one year from no

Question

P 7-22 (similar to) Question Help Zoom Enterprises expects that one year from now it will pay a total dividend of $4.9 million and repurchase $4.9 million worth of shares. It plans to spend $9.8 million on dividends and repurchases every year after that forever, although it may not always be an even split between dividends and repurchases. If Zoom's equity cost of capital is 13.1% and it has 5.3 million shares outstanding, what is its share price today? The price per share is $. (Round to the nearest cent.)

Explanation / Answer

Using the total payout method, the equity value will be the PV of the total future payouts. Total Equity = Dividend + Repurchase of Equity Total Equity = $4.9M + $4.9M $9,800,000.00 Cost of Equity 13.10% Present value of equity @ perpetuity = $9800000/13.10% $74,809,160.31 Price per share = $74,809,160.31/5,300,000 $14.11

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