Answered step by step
Verified Expert Solution
Question
1 Approved Answer
6. (8 points) Company Alpha Ltd. follows the policy of conducting share buyback when the market price of company's stock is below its fair value.
6. (8 points) Company Alpha Ltd. follows the policy of conducting share buyback when the market price of company's stock is below its "fair value". The company calculates fair value of a stock as the average of the two fair value estimates: (1) the estimate obtained from discounted dividend model and (2) the estimate obtained from multiple valuation approach. Alpha Ltd. has projected EBITDA of $875.5 mln, debt of $987 mln and excess cash of $78 mln. Firm has 50 mln shares outstanding and the market price of firm's stock is $47.3. Table below provides data on a set of the firms comparable to Alpha Itd. Projected next year dividend per share of Alpha Ltd is $2.25 and is expected to grow at 4% till eternity. Further, CAPM beta of Alpha Ltd stock is 0.9, risk-free rate is 3%, and the market risk premium is 7%. Given the data, should the firm announce a share buyback? (For the purpose of this question, ignore other potential motives to conduct share buybacks). Explain and show your calculations! 6. (8 points) Company Alpha Ltd. follows the policy of conducting share buyback when the market price of company's stock is below its "fair value". The company calculates fair value of a stock as the average of the two fair value estimates: (1) the estimate obtained from discounted dividend model and (2) the estimate obtained from multiple valuation approach. Alpha Ltd. has projected EBITDA of $875.5 mln, debt of $987 mln and excess cash of $78 mln. Firm has 50 mln shares outstanding and the market price of firm's stock is $47.3. Table below provides data on a set of the firms comparable to Alpha Itd. Projected next year dividend per share of Alpha Ltd is $2.25 and is expected to grow at 4% till eternity. Further, CAPM beta of Alpha Ltd stock is 0.9, risk-free rate is 3%, and the market risk premium is 7%. Given the data, should the firm announce a share buyback? (For the purpose of this question, ignore other potential motives to conduct share buybacks). Explain and show your calculations
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started