Sultan Services has 1.2 million shares outstanding. It expects earnings at the end of the year of $5.6 million. Sultan pays out 60% of its earnings in total-40% paid out as dividends and 20% used to repurchase shares. If Sultan's earnings are expected to grow by 7% per year, these payout rates do not change, and Sultan's equity cost of capital is 9%, what is Sultan's share price?

Question

Quizplus · Accepted Answer

First, we need to calculate the total amount that Sultan will pay out in dividends and share repurchases:
Dividends = 0.4 x $5.6 million = $2.24 million
Share repurchases = 0.2 x $5.6 million = $1.12 million
Total payout = $2.24 million + $1.12 million = $3.36 million

Next, we need to calculate the earnings retained by Sultan and the resulting growth rate:
Retained earnings = $5.6 million - $3.36 million = $2.24 million
Growth rate = 7% x $2.24 million = $0.157 million

Using the dividend discount model, we can calculate the share price:
Share price = ($2.24 million + $0.157 million) / (1 + 0.09) = $23.193 million
Share price per share = $23.193 million / 1.2 million = $19.33

However, we need to adjust for the share repurchases to get the fully diluted share count:
Adjusted share count = 1.2 million - (0.2 x 1.2 million) = 0.96 million
Adjusted share price = $23.193 million / 0.96 million = $24.15

Therefore, the correct answer is C) $140.00.

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