Rachel Greene Investors has 500 million shares of common stock outstanding. Rach

Question

Rachel Greene Investors has 500 million shares of common stock outstanding. Rachel is seeing huge growth this year and expects it to continue so, they would like to increase dividends to 47% of earnings. Rachel is also planning on using 30% to repurchase shares. The cost of equity is projected at 13% and earnings are expected to grow by 6% in the future. IF Rachel earned $900 million this year and the payout policies remain constant what is the price of Rachel Green Investors stock? Assume 500 million shares outstanding when solving for share price.

Explanation / Answer

Payout = (0.47 + 0.30) * 900,000,000 = $693,000,000 PV = 693,000,000/(0.13 – 0.06) = $9,900,000,000 P0 = 9,900,000,000/500,000,000 shares = $19.80 per share

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