Chittenden Enterprises has 600 million shares outstanding. It expects earnings at the end of the year to be $ 970 million. The firm's equity cost of capital is 8 %. Chittenden pays out 30% of its earnings in total: 20% paid out as dividends and 10% used to repurchase shares. If Chittenden's earnings are expected to grow at a constant 5 % per year, what is Chittenden's share price?

Question

Fabian Larson

Business

6 April, 08:57

Chittenden Enterprises has 600 million shares outstanding. It expects earnings at the end of the year to be $ 970 million. The firm's equity cost of capital is 8 %. Chittenden pays out 30% of its earnings in total: 20% paid out as dividends and 10% used to repurchase shares. If Chittenden's earnings are expected to grow at a constant 5 % per year, what is Chittenden's share price?

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Answers (1)

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Peyton Holt · Answer 1

Chittenden enterprises' share price will be $16.167.

Explanation:

Chittenden Enterprises has 600 million outstanding shares.

The expected earnings at the end of the year are $970 million.

The equity cost of capital is 8%.

The constant growth rate is 5%.

Next year's dividend per share

=30%*$970 million/600 million

=$291 million/600 million

=$0.485/share

Share Price

= Dividend next year / (Cost of Equity - Constant growth rate)

=$0.485 / (8% - 5%)

=$16.167