Cork Bottlers has 84 million shares outstanding and expects earnings at the end of this year of $54 million.Cork plans to pay out 30% of its earnings as a dividend and 10% of its earnings through share repurchases.The firm has an equity cost of capital of 12%.If Tarmac' earnings are expected to grow by 6.5% per year and these payout rates remain constant,what is Tarmac's share price?

Question

Quizplus · Accepted Answer

First, we need to calculate the total payout to shareholders.

Dividend payout = 30% x $54 million = $16.2 million 
Share repurchase payout = 10% x $54 million = $5.4 million 
Total payout = $16.2 million + $5.4 million = $21.6 million

Next, we can calculate the expected earnings per share (EPS) by dividing the remaining earnings by the number of shares outstanding:

Earnings for shareholders = $54 million - $21.6 million = $32.4 million 
EPS = $32.4 million / 84 million shares = $0.386

Using the dividend discount model, we can calculate the share price:

Share price = Dividend per share / (Cost of equity - Expected growth rate)

The dividend per share is simply the dividend payout divided by the number of shares outstanding:

Dividend per share = $16.2 million / 84 million shares = $0.193

Plugging in the numbers:

Share price = $0.193 / (0.12 - 0.065) = $4.68

Therefore, the correct answer is C ($4.68).

Cork Bottlers Has 84 Million Shares Outstanding and Expects Earnings