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Aaron Inc. has 335 million shares outstanding. It expectsearnings at the end of the year...

Aaron Inc. has 335 million shares outstanding. It expects earnings at the end of the year to be $650 million. The firm's equity cost of capital is 10%. Aaron pays out 50% of its earnings in total: 30% paid out as dividends and20% used to repurchase shares. If Aaron's earnings are expected to grow at a constant 6% per year, what is Aaron's share price?

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Expert Solution

- earnings at the end of the year(E) = $650 million

Total Payout ratio = 50%

Total payout at the end of year(D1) = $650 million*50% = $325 million

Growth rate(g) = 6% per year

equity cost of capital(ke) = 10%

Calculating the value of Firm:-

Value of Firm = D1/(ke-g)

Value of Firm = $325 million/(0.10-0.06)

Value of Firm = $8125 million

Price per share = Value of Firm/No of shares outstanding

Price per share = $8125 million/335 million

Price per share = $24.25

So, Aaron's share​ price is $24.25

jeff jeffy answered 2 years ago
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