1. You expect Amalgamated Company will pay $40 million in dividends and repurcha
ID: 2796116 • Letter: 1
Question
1. You expect Amalgamated Company will pay $40 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 9% in Year 2, 8% in Year 3 and 8% in Year 4. You also expect Amalgamated could be bought by a larger competitor at the end of Year 4 for $3.5 billion. If all payments are made at year end, and you’ve calculated the cost of equity to be 9.5%, what do you estimate the value of Amalgamated’s net worth to be now? (Start by drawing 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
Forecast the payout for the next four years.
Year 1: 40 + 70 = 110m, Year 2: 110m x 1.09 = 119.9m and so on as shown above.
Net worth = CF1 / (1 + r) + CF2 / (1 + r)^2 + CF3 / (1 + r)^3 + (CF4 + TV4) / (1 + r)^4
= 110 / 1.095 + 119.9 / 1.095^2 + 129.5 / 1.095^3 + (139.8 + 3500) / 1.095^4
= $2,830,869,655
Share Price = Net Worth / No. of shares = $28.31
Year Payout 1 $ 110,000,000 2 $ 119,900,000 3 $ 129,492,000 4 $ 139,851,360 TV $ 3,500,000,000 NPV $2,830,869,655 Price $28.31Related Questions
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