Valence Electronics has 217 million shares outstanding. It expects earnings at t

Question

Valence Electronics has 217 million shares outstanding. It expects earnings at the end of the year of $760 million. Valence pays out 40% of its earnings in total?15% paid out as dividends and 25% used to repurchase shares. If Valence's earnings are expected to grow by 6% per year, these payout rates do not change, and Valence's equity cost of capital is 8%, what is Valence's share price? A) $10.51 B) $24.40 C) $56.60 D) $70.05

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Explanation / Answer

This problem deals with share repurchases and the total payout model. The first step involves multiplying the payout rate, 40% total, by the total earnings.

40% X $760 million = $304 million

Now, we must find the present value of the future total dividend payments and net repurchases. This is equal to the payout over the difference of the equity cost of capital and earnings growth rate

$304 million / (8% - 6%) = $15.2 billion

Finally, to find the share price, divide the present value of future total dividends and net repurchases ($15.2 billion) by the number of shares outstanding (217 million)

$15.2 billion / 217 million shares outstanding = $70.05 per share D.)

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