Jumbo Transport, an air-cargo company, expects to have earnings per share of $2.00 in the coming year. It decides to retain 10% of these earnings in order to lease new aircraft. The return on this investment will be 25%. If its equity cost of capital is 11%, what is the expected share price of Jumbo Transport?

Question

Quizplus · Accepted Answer

D) D1 = $2.00 × (1 - 0.1) = $1.8;
g = 0.1 × 0.25 = 0.025;
P0 = $1.8 / (0.11 - 0.025) = $21.18

Jumbo Transport, an Air-Cargo Company, Expects to Have Earnings Per