Chittenden Enterprises has 632 million shares outstanding.It expects earnings at the end of the year to be $940 million.The firm's equity cost of capital is 10%.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 4% per year,what is Chittenden's share price?

Question

Quizplus · Accepted Answer

First, calculate the total amount of earnings that will be paid out:

30% * $940 million = $282 million

Of that $282 million:

- 20% ($188.8 million) will be paid out as dividends 
- 10% ($94.2 million) will be used to repurchase shares

The remaining $657.8 million will be retained by the company to fund growth opportunities.

Next, calculate the dividends per share:

$188.8 million / 632 million shares = $0.298 per share

Now, calculate the earnings per share:

$657.8 million / 632 million shares = $1.04 per share

To calculate the price per share, we can use the dividend discount model:

Price per share = (Next year's expected dividend per share) / (Equity cost of capital - Dividend growth rate)

Assuming a 4% growth rate in dividends, the price per share is:

Price per share = ($0.298 * 1.04) / (0.10 - 0.04) = $7.44

Therefore, the correct answer is C.

Chittenden Enterprises Has 632 Million Shares Outstanding