Universal Air is a no-growth firm and has two million shares outstanding. It expects to earn a constant $20 million per year on its assets. If it has no debt, all earnings are paid out as dividends, and the cost of capital is 10 percent, calculate the current price per share of the stock.

Question

Quizplus · Accepted Answer

Since Universal Air is a no-growth firm, the dividends will be constant each year, equal to the earnings. However, since it has no debt, all earnings are paid out as dividends. Therefore, the dividends per share would be:
Dividends per share = Earnings / Number of shares
Dividends per share = $20,000,000 / 2,000,000 shares
Dividends per share = $10 per share

Now, we can use the constant growth formula to calculate the price per share:
Price per share = Dividends per share / (Cost of capital - Growth rate)
Since the firm has no growth, the growth rate is zero. Therefore, 
Price per share = Dividends per share / Cost of capital
Price per share = $10 / 0.10
Price per share = $100

Hence, the current price per share of the stock is $100. Therefore, the best choice is C.

Universal Air Is a No-Growth Firm and Has Two Million