Tarmac Airlines has 115 million shares outstanding and expects earnings at the end of this year of $370 million.Tarmac plans to pay out 40% of its earnings as a dividend and 20% of its earnings through share repurchases.The firm has an equity cost of capital of 8%.If Tarmac' earnings are expected to grow by 3% per year and these payout rates remain constant,what is Tarmac's share price?

Question

Quizplus · Accepted Answer

The share price can be calculated using the Gordon Growth Model (Dividend Discount Model). The dividend per share is $370 million * 40% / 115 million shares = $1.287. The share repurchase per share is $370 million * 20% / 115 million shares = $0.643. The total payout per share is $1.287 + $0.643 = $1.93. The growth rate is 3%, and the equity cost of capital is 8%. The share price is $1.93 / (0.08 - 0.03) = $38.61.

Tarmac Airlines Has 115 Million Shares Outstanding and Expects Earnings