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, we need to calculate the amount of earnings available for distribution:

Earnings available for distribution = $940 million x 30% = $282 million

Then, we can calculate the portion of earnings used for share repurchases:

Share repurchases = $940 million x 10% = $94 million

This leaves $188 million available for dividends:

Dividends = $940 million x 20% = $188 million

Next, we can calculate the total dividend per share:

Dividend per share = Dividends / Shares outstanding
Dividend per share = $188 million / 632 million
Dividend per share = $0.2975

To calculate the cost of equity, we can use the dividend discount model:

Cost of equity = (Dividend per share / Share price) + Growth rate
10% = ($0.2975 / Share price) + 4%
Share price = $7.44

Therefore, the answer is (C) $7.44.

Chittenden Enterprises Has 632 Million Shares Outstanding