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Homework answers / question archive / A no?growth firm has two million shares outstanding, no debt and pays out all earnings as dividends
A no?growth firm has two million shares outstanding, no debt and pays out all earnings as dividends.
Until now, it consistently earned $20 million per year on its assets. Its cost of capital is 10%.
a. Calculate its stock price share.
b. As a result of a change in financial policy, assume the company is now able to squeeze out 1%
annual growth by plowing back 5% of earnings. Calculate its new stock price per share
a. Stock price value=D1/(cost of capital-growth rate)
Earnings per share=20/2=10
All the earnings are paid as dividends.
Stock price value=10/(10%-0%)=10/10%=100
b. growth rate=1%
D1=Earnings per share*(1-plowback ratio)=10*(1-5%)=10*95%=9.5
Stock price value=9.5/(10%-1%)=9.5/9%=105.6
