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%,calculate the current price per share of the stock.

Question

Quizplus · Accepted Answer

Using the Gordon Growth Model:
P = D / (r - g)
Where P is the stock price, D is the dividend, r is the cost of capital, and g is the expected growth rate of dividends.
Since the company is a no-growth firm, g = 0.
D = Earnings per share = $20 million / 2 million shares = $10 per share
r = 10%
P = $10 / (0.10 - 0) = $100 per share

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