Sultan Services has 1.2 million shares outstanding. It expects earnings at the end of the year of $6.0 million. Sultan pays out 60% of its earnings in total: 40% paid out as dividends and 20% used to repurchase shares. If Sultan's earnings are expected to grow by 5% per year, these payout rates do not change, and Sultan's equity cost of capital is 10%, what is Sultan's share price? A) $60.00 B) $12.00 C) $36.00 D) $24.00

Question

Fleming

Business

13 September, 11:11

Sultan Services has 1.2 million shares outstanding. It expects earnings at the end of the year of $6.0 million. Sultan pays out 60% of its earnings in total: 40% paid out as dividends and 20% used to repurchase shares. If Sultan's earnings are expected to grow by 5% per year, these payout rates do not change, and Sultan's equity cost of capital is 10%, what is Sultan's share price? A) $60.00 B) $12.00 C) $36.00 D) $24.00

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Nathaniel Baker · Answer 1

A) $60.00

Explanation:

to calculate the value of Sultan's stocks, we need to use the growing perpetuity formula:

stock price = dividend / (required return rate - growth rate)

dividend = ($6,000,000 x 60%) / 1.2 million shares = $3,600,000 / 1.2 million shares = $3 per share required return rate = 10% growth rate = 5%

stock price = $3 / (10% - 5%) = $3 / 5% = $60 per share