Extruded Elements
Extruded Elements had Net Income of $25,000,000 last year, and $26,250,000 this year (in line with its long-term earnings growth rate). There are 4,000,000 shares outstanding, and the firm follows a policy of paying 30% of its earnings out as dividends
-The required rate of return on Extruded's shares is 13%.What is the share price today based on the Gordon growth model?

Question

Quizplus · Accepted Answer

The Gordon growth model (Dividend Discount Model) calculates the share price as P = D1 / (r - g), where D1 is the expected dividend next year, r is the required rate of return, and g is the growth rate. The growth rate (g) is 5% (calculated from the increase in net income from $25,000,000 to $26,250,000). The dividend next year (D1) is 30% of $26,250,000 divided by 4,000,000 shares, which is $1.96875. Using the formula: P = $1.96875 / (0.13 - 0.05) = $25.88.

Extruded Elements Extruded Elements Had Net Income of $25,000,000 Last Year, and Year