Sultan Services has 1.2 million shares outstanding.It expects earnings at the end of the year of $5.6 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 7% per year,these payout rates do not change,and Sultan's equity cost of capital is 9%,what is Sultan's share price?

Question

Quizplus · Accepted Answer

Firstly, we need to find out Sultan's after-tax earnings, which is:
$5.6 million * (1-0.4) = $3.36 million
Then, we need to deduct 20% of the after-tax earnings used for share repurchases:
$3.36 million * (1-0.2) = $2.688 million
Next, we need to find out Sultan's dividends per share:
Dividends per share = ($3.36 million * 0.4) / 1.2 million = $1.12 per share
Then, we can find out Sultan's share price using the Gordon growth model:
Share price = Dividends per share / (Cost of equity - Dividend growth rate)
The dividend growth rate is equal to the earnings growth rate multiplied by the payout rate:
Dividend growth rate = 7% * 0.4 = 2.8%
Substituting the values into the formula, we get:
Share price = $1.12 / (0.09 - 0.028) = $140.00
Therefore, the best choice is D.

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