Problem 1: Suppose Cisco Systems pays no dividends but spent $5billion on share repurchases last year. If Cisco's equity cost of capital is 12%, and if the amount spent on repurchases is expected to grow by 8% per year, estimate Cisco's market capitalization. If Cisco has 6billion shares outstanding, what stock price does this correspond to?
Problem 2: In mid-2006 Coca Cola Company has a share price of $43, its dividend was $1.24, and you expect Coca cola to raise this dividend by approximately 7% pr year in perpetuity.
a. If Coca Cola's equity cost of capital is 8%, what share price would you expect based on your estimate of the dividend growth rate?
b. Given Coca Cola's share price, what would you conclude about your assessment of Coca cola's future dividend growth?
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