Reference no: EM133109970

Potential stock investment

Wally wants your advice on a potential stock purchase. There is excess capital on the balance sheet - and he wants to put it to good use. He is excited because he heard that Oscar Industries stock is trading at $50. He notes that Oscar Industries just paid out $1.7308M in dividends and repurchased $4.3983M worth of shares. Oscar Industries has 1.12M shares outstanding. Total payouts are expected to grow at an annual rate of 2%. Wally - like the other investors of Oscar Industries - expects a 10% rate of return on shares. What should Wally do? You recall from your finance class that you should use the Total Payout model to estimate of the stock price today. You can assume that all payouts occur annually and that the next payout will be in exactly one year. Show your work and clearly state your final answer.

(b) Wally thanks you for your advice. But, thinking about it some more, Wally asks you if he should buy or not buy the stock if the stock were currently trading at $100 instead of $50. What do you advise him?

(c) Wally wonders how things might be different if the payouts mentioned above did not grow by 2% - but instead were flat. Should the stock be purchased? Assume that the price is still $50.