Question

Universal Air is a no-growth firm and has two million shares outstanding. It expects to earn a constant $20 million per year on its assets. If it has no debt, all earnings are paid out as dividends, and the cost of capital is 10 percent, calculate the current price per share of the stock.

Answer 1

Answer:

$100/share

Explanation:

Calculation to determine the current price per share of the stock.

First step

EPS = DPS = $20,000,000/($20,000,000*10%)

EPS = DPS = $20,000,000/$2,000,000

EPS = DPS = $10 per share

Now let determine the current price per share of the stock

P0 = 10/0.10

P0= $100/share

Therefore current price per share of the stock is $100/share